Harmonized Accountings

Harmonized accounting 1
Do Harmonized Accounting Standards Lead to Harmonized Accounting Practices?
An Empirical Study of IAS 39 Measurement Requirements in Ireland
A Thesis
Presented to
In Partial Fulfillment of the Requirement for a master of ------------------
October, 2009
Table of contents
Table of contents..................................................................................................................2
List of figures.......................................................................................................................5
Abstract................................................................................................................................6
Chapter 1: Introduction and problem statement..................................................................7
1.0. Introduction...............................................................................................................7
1.3. Background to the IAS 39 and fair value accounting.............................................11
1.3.1. Specific objectives of IAS 39..........................................................................11
1.3.2 The fair value model.........................................................................................12
1.4. Motivation for studying IAS...................................................................................13
1.5: Research questions.................................................................................................15
1.6. Research methodology............................................................................................16
1.7. Contributions of this research.................................................................................16
Chapter 2: Literature Review.............................................................................................20
2.1: Introduction............................................................................................................20
2.2. An overview of the IAS 39.....................................................................................21
2.3. The key provisions of IAS 39.................................................................................24
2.4: The impact of IAS 39 for first time adoption.........................................................27
2.5: Fair value accounting..............................................................................................29
2.5.1: Precedents of fair value accounting model......................................................29
2.5.2: Definition.........................................................................................................31
2.5.3: Debates over the fair value model: The pros, cons, reliability and relevance.....35
2.5.3.1: Pros of the fair value model..........................................................................37
2.5.3.2: Cons of the fair value model.........................................................................38
2.5.3.3: Debates of over the relevance and reliability of fair value accounting........40
2.6: Institutional background in Ireland: Towards the application of international
accounting standards......................................................................................................44
2.6.1: Common Law accounting frameworks............................................................44
2.6.2: The accounting framework in Ireland.............................................................45
2.7: Prior research on accounting harmonization and fair value accounting.................50
2.8. Summary of literature reviewed.............................................................................55
Chapter 3: Research methodology.....................................................................................57
3.1: Introduction............................................................................................................57
3.2: Research design......................................................................................................57
3.3: Research hypotheses...............................................................................................59
3.4: Samples and samples analysis................................................................................60
4.1: Introduction............................................................................................................64
4.2: Descriptive statistics...............................................................................................64
Statistical analysis..........................................................................................................69
Chapter 5: Conclusion.......................................................................................................73
5.2: Limitations of the research and future research directions.....................................75
5.3: significance of the research and study implications...............................................77
References..........................................................................................................................78
Appendices........................................................................................................................86
List of tables
Table 1: Industry sector categorization---------------------------------------------------------62
Table 2:Jaccard indices by sector categorization ---------------------------------------------67
Table 3: assessment by auditors -----------------------------------------------------------------67
Table 4: Jacccard indices by size of firm -------------------------------------------------------68
Table 5: Differences in means of Jaccard index by sector------------------------------------69
Table 6: Differences in means of Jaccard index by size---------------------------------------70
Table 7: Differences in means of Jaccard index by auditor-----------------------------------70
Table 8: Summary of hypotheses results --------------------------------------------------------74

List of figures
Figure 1: A 2*2 table for jaccard indices computations -----------------------------------63

Abstract
The underlying interest in the last few years have been an assessment of the extent
to which the fair value measurements in the EU nations have risen in tandem following
the IFRS adoption and whether this has been accompanied by improved compatibility in
measurement policies, both within and between the various nations. The objectives of this
paper were to investigate the levels of compliance with the complex standard IAS 39,
financial instruments: recognition and measurement (IASB 2005) among companies
listed in the Dublin stock Exchange, Ireland. The analysis presented in the paper has
indicated that the overall Jaccard index was rather low at 0.4337 levels. Analysis of the
levels of compliance by the industry sector indicated that financial companies, investment
and services industry, technology and telecommunication companies and production,
industrial and construction sectors differed in Jaccard means (0.6397 of 0.4548, 0.4242
and 0.3766 respectively). Companies audited by the big 4 had higher values
(mean=0.4532) as compared to the others audited by small auditors (mean=0.2434).
Finally, big companies registered higher values (mean=0.6361) relative to the smaller
companies (mean =0.3239). The statistical analysis employing t-tests indicated that the
mean differences between sector and size were significant enough at the 0.05 although
the influence of auditors was found not significant. Future researches on accounting
harmonization and compliance with IFRS/IAS39 have also been presented.

Chapter 1: Introduction and problem statement
1.0. Introduction
The last few years has witnessed financial accounting paradigms from historical
to fair value concepts in reporting as the need for harmonization of financial reporting
undergoes tremendous transformations. The determinants role in the evolution of
harmonized accounting standards has been the amplification for compatible accounting
referents as a direct consequence of globalization and economic integration processes. It
has been advanced that the council of European nations directive requiring all companies
listed on the European stock exchange to structure their consolidated final accounts
according to the IFRS from the year 2005 onwards at the very latest, acted as an
important milestone within the frameworks of accounting practices in the history of
Europe as delineated from the fact that without the enactment of these new paradigms,
there would have been 27 different methods of reporting applied by the companies listed
at the EU today (Washington, 2005). The key behind the mandated set of harmonized
accounting standards for listed companies in EU was to provide a level playing field for
participants in these capital markets by increasing the compatibility of financial
statements of publicly traded companies across Europe (Regulation (EC) No. 1606/2002,
Par. 1). This would also accord financial market participants with comparable financial
statements and other reporting information that would further facilitate their decision
making where a single set of high quality accounting standards were in place (Cascino
and Gassen, 2009).
The merits surrounding the adoption of IFRS were the focal points of debates and
these were largely structured around the tenets of whether these harmonization ventures
would indeed be worthwhile. For example, it was important to assess whether the
expected increased capital flows would outweigh the costs of implementations and lost
diversity in the individual countries accounting standards (Armstrong, et.al, 2008).
However, the major areas of contestation regarded the complex standards that would
have to be followed under the new guidelines; IAS 39, financial instruments: recognition
and measurement. The bearing was that the adoption of the more poignant IAS 39
guidelines had the potential to materially affect the financial statements amounts for firms
with a large number of financial instruments such as banks (Armstrong, Barth,
Jagolinzer, & Riedl, 2008).
Regarding the above requirements, two major guidelines were deemed
controversial; use of fair value as a measurement attribute and the quantifying criteria for
hedging. As regards the fair value measurement attribute, the guidelines required that
financial instruments (notably derivatives) be recognized at fair value that would allow
firms to designate the financial instruments irrevocably on initial recognition as ones to
be measured at fair value with changes in fair value recognized in profit or loss. The
second was as regards hedging where the guidelines were found hard to satisfy.
According to the IAS 39 guidelines, hedging for many financial instruments cannot be
entered into ostensibly for hedging purposes (Armstrong, 2007). It should be understood
that hedging accounting results in gains or losses on a hedged item and losses (or gains)
on a designated hedging instrument being recognized in profits or loss at the same time to
the extent that the gains (or losses) on the hedged item results from the hedged risk (s)
(Armstrong, et.al, 2008). Conversely, hedge accounting reduces volatility in profits or
losses resulting from activities such as measuring the hedged item at amortized costs.
Given these perspectives, it was viewed in some circles that the need to recognize and
measure assets in line with the IAS39 guidelines would present some major headaches to
corporations especially banks not only on the two principle aspects mentioned but on
several aspects as well. Primarily, adoption of the fair value model and the hedging
requirements as stipulated in the IAS 39 guidelines meant that companies would have to
structure their domestic GAAP in line with new accounting requirements. As noted by
several authors, most of the European domestic standards did not include standards
specifying the financial reporting for many financial instruments (Armstrong, et.al,
2008).
The underlying interest in the last few years have been an assessment of the extent
to which the fair value measurements in the EU nations have risen in tandem following
the IFRS adoption and whether this has been accompanied by improved compatibility in
measurement policies. The objectives of this paper are to investigate the levels of
compliance with the complex standard IAS 39, financial instruments: recognition and
measurement (IASB 2005) among companies listed in the Dublin stock Exchange,
Ireland. By employing the JACCARD index, the study will aim to establish the levels of
compliance for the Ireland companies listed in the Dublin stock exchange in 2005. The
study will also attempt to designate how the levels of compliance have varied among
these companies as an attribute of size, industry sector and auditors employed by these
firms.
1.2. Organization of the thesis
The first chapter will present a background to the international harmonization
initiatives where the IAS 39, Recognition and measurement constructs are explained and
the fair value accounting standards highlighted. The motivation for the carrying out the
study has been the growing need to assess whether harmonization initiatives are
accompanied by the benefic outcomes sought and as assessed, inter alia, by the levels of
compliance. The methodologies and the contributions the study wishes to make in the
field of accounting harmonization are also detailed. In the second chapter, a detailed
synthesis of both academic and theoretical literature on the key constructs under
investigation in the fields of harmonized accounting standards is presented. Essentially,
the literature reviewed covers the mandated IAS 39 guidelines and the accompanying
impacts on the national GAAP in EU nations in general and the republic of Ireland in
particular. The analysis then delves into a synthesis of the fair value accounting modules
wherein a critical review of the underlying frameworks, the pros and cons and the debates
over its applicability (especially as concerns the aspects of reliability and relevance) are
then clearly disseminated. An overview of the Ireland accounting framework and the
impacts of the IAS 39 referents are then presented before a highlight of the key studies on
the accounting harmonization and compliance is disseminated. The methodology chapter
covers the research design, samples and samples sizes, the hypotheses guiding research
and the data generation procedures followed to answer the questions of the study. A
highlight of how data will be analyzed is also presented. The fourth chapter provides the
results of the study and a discussion of the results. The fifth chapter is the conclusion of
the thesis and provides a summary of the key findings, implication of the research,
conclusions and recommendations.

1.3. Background to the IAS 39 and fair value accounting
1.3.1. Specific objectives of IAS 39
The requirements for listed companies in EU to adopt IFRS guidelines were
meant at enhancing the levels of compatibility and financial reporting quality among the
European nations by mandating a single set of accounting standards referents (Regulation
(EC) No. 1606/2002). This essentially related to two levels of analysis. First, the standard
level and secondly, the accounting information level, which has been referred to as the
actual accounting outcomes resulting from the application of the standards (Cassino &
Gassen, 2008). This would lead to enhanced harmonization, compatibility and
convergence in the accounting arena. A definition of accounting harmonization at the
standards level (de jure or formal level) has been presented as a process that leads to
harmonized accounting standards, while at the accounting level, the harmonization is not
viewed as a strategy or an action but rather an effect (de factor, or material
harmonization) (Van der Tas, 1992).
It has been noted by several authors that harmonization in accounting practices
increases the compatibility of accounting practices (De Franco, Kothari & Verdi, 2008).
In theory, harmonized accounting practices would equate to homogeneous accounting of
homogenous economic activities across firms while heterogeneous activities would
likewise be accounted for across heterogeneous firms .Essentially, this would imply that
where accounting outcomes are heterogeneous at the firm level in different countries but
this heterogeneity is more homogeneous across countries after IFRS adoption, increases
in cross-country homogeneity would be the case (Cassino & Gassen, 2008).

1.3.2 The fair value model
The use of fair value referents represents a financial reporting paradigm
conceptualized in fair valuation of financial instruments, away from historical concepts.
Within the contexts of IAS 39 guidelines, every standard of value (in the financial
instruments) represents a series of detailed assessment criterions guiding recognition and
measurement. As regards the fair value concepts, the most widely used criteria are the
‘fair value’ and the ‘fair market value’ conjectures. The philosophy behind the adoption
of the fair value models as articulated by Pita and Gutierez (2006) are structured around
three constructs: first, the existent published prices in an active market ideally should
present the best evidence of fair value and when in existence should be used to value the
financial asset or liability. In this subtext, the frameworks are that a financial instrument
should be quoted in an active market where the listed prices are easily and regularly
available. Secondly, in the instances of where the market for a given financial instrument
is not active, then an institution should ideally determine the fair value of such an
instrument by adopting a valuation technique that essentially incorporates the overriding
factors that participants in such a market look out for when delineating the price and
which are consistent and in tandem with accepted economic methods used to set the
prices of such financial instruments. Third, an institution should be excluded from
valuing an instrument at fair value when the ranges of acceptable estimates are likely
which cannot be reasonably estimated (Pita & Gutierez, 2006). It should be understood
however that the fair valuation conceptualizations do not always achieve unanimity.
Thus, whereas on one side the historical costs have not been considered capable of
achieving the relevant quality of financial information (Gerald, 2003 as cited in Demaria
& Dufuor, 2007), the fair value accounting has been cited as intensifying volatility and
giving a value of breakage of financial institutions (Earnst & Young, 2005: Bertoni &
Derosa, 2005).
In the opinions of Bertoni & Derosa (2005), the implementation of the fair value
concepts as detailed in the IAS 39 guidelines presented interesting times for majority of
firms, especially when it is considered that the prevailing accounting frameworks in
continental European nations meant a radical change of perspectives for preparers and
users alike, largely as a construct of the differing national GAAP. The observations have
been supported in both academic and empirical literature.
1.4. Motivation for studying IAS
The determinants role in the evolution of harmonized accounting standards has been
the amplification for compatible accounting referents as a direct consequence of
globalization and economic integration processes. One of the elements that contribute to
the need for harmonization has been the growing concentration in capital among firms
with international vacations. Given that the overarching purpose of capital concentration
is financial and capital profitableness improvements, the existence of groups or holdings
have been the outcomes. Another reason has been the growing levels of mergers and
acquisitions that have become significant economic activities. The financial orientation of
concentration and the increasing roles of finances in the contemporary economies have
further necessitated the need for harmonization, especially as regards the domination of
financial capital over other forms of capital (Ionascu, 2003). While not being exhaustive,
other reasons advanced in both academic and empirical literature have included the
growing numbers in multinational and transnational companies, answering the needs of

the information of capital and stock market investors, the globalization of markets
(especially financial and the economic entities of the determinants) and the orientation of
multinational companies to external sources of financing (Mustata & Dumitru, 2006).
The wholesome effect of these factors has been the desire to harmonize accounting
standards. It is seen that such ventures would benefic investors where common standards
in the representation of financial instruments are referents.
A major bottleneck that is facing international accounting standardization efforts
has been the measurement of the levels of harmonization. According to Mustata and
Dumitru (2006), beyond the conceptual approaches and the visions presented in prior
research in later days has been the preoccupations regarding the measurements of the
comparability and compatibility degrees between the existent accounting settlements at
the international arena and national GAAP at the local domains. As this author elucidates,
pragmatisms and complexities in measurements has been the growth in statistical
methods adopted in measuring accounting harmonization to the extent that delineating
the exact levels for the same becomes blurred.
Prior studies can be broadly grouped into two major categories, i.e., those that
have focused attention on the degrees of compatibility between the international
accounting settlements (IFRS/IAS) and the national accounting standards (NAS) (formal
harmonization), and those that have based their computations on the quantification and
interpretation of the compatibility degree between the implementation into practice of the
international settlements and the existent stipulations at the IFRS level (Mustata &
Dumitru, 2006). These studies have to a large extent presented much generalized images
of the scripted and factual reality of the IFRS implementation at the national accounting
levels. A major limitation has especially been the inexistent of information as regards the
correlation degrees between the need for IFRS implementation existent at the level of a
selected state and at the level of IFRS implementation at a certain time (in the settlement
areas as well as at the practical levels) for the same analyzed states (Mustata & Dumitru,
2006). Ball, Kothari and Robin (2000) have noted that there are several advantages in
studying accrual reporting as opposed to simply studying the standards. As these authors
elucidates, much accounting practices is not determined by rules but rather, practice, is
detailed than rules and that while rules lag innovations, majority of companies tend to not
follow rules as articulated.
Given the above perspectives, the need to access the levels of compliance to a
complex standard such as IAS 39, in the case of a common law country such as Ireland
acted as a motivation to the current study. An initial review of literature has suggested
that although the requirements to adopt IFRS/IAS 39 guidelines were vouched as benefic
on several accounts, there were fears on the challenges that these would present to the
Irish companies. These largely stemmed from the observations that compared to the Irish
GAAP; there were potentially a number of measurement differentials in the financial
statements and as regarding disclosures.
1.5: Research questions
Specifically, the study is expected to provide an answer to the following
questions:
1. What are the levels of compliance to IAS 39 for publicly listed companies
in 2005 in Dublin Stock exchange?

2. What are the variations in the levels of compliance to IAS 39 standards
between the different industry sectors, for the publicly traded companies
in the Dublin Stock Exchange?
3. What are the variations in the levels of compliance to IAS 39 as assessed
by corporations’ size for the publicly traded companies in the Dublin
Stock Exchange?
4. Does the auditor influence compliance to IFRS influence IAS 39?
1.6. Research methodology
The current study will investigate the levels of compliance based on a sample of
companies drawn from Ireland as listed in Dublin Stock exchange in the year 2005. The
Jacard (JACC) index will be employed to test the extent to which harmonization between
IAS 39 and the financial reporting practice had been attained, as advised by Rahman et.
al (2002) and Morais. Statistical tests will then be employed to identify companies’
specific attributes that may have influenced the levels of convergence of the reporting
practices of the financial instruments. The theoretical grounding of the synopsis will be
the understanding that given Ireland’s GAAP rules for recognizing assets are at a variant
to the IAS 39 guidelines, the empirical analysis would provide a strong test in identifying
the effects of accounting standards compliance and tentatively posit the levels of
harmonization (or lack thereof).
1.7. Contributions of this research
Several reasons underpin the need for evaluations of harmonization levels at the
state and international levels. The existence of such information is benefic for policies
and accounting constructs formulation in tandem with global paradigm shifts in
accounting standards. The existence of such information (or some systems of
measurement) of accounting harmonization need can (in the opinions of Mustata &
Dumitru, 2006) also help counter some decisions of the political factor or avail some real
and scientifically defensible tenets for counteracting harmonization oppositions. The
need-analysis for harmonization benefic (or lack thereof) at national or international
accounting standard domains can also present defensible tenets as regards decisions on
whether to adopt or not adopt stipulated guidelines. As noted by Mustata & Dumitru
(2006) such information can help inform policy and present options as regards adoption
of guidelines at the international or national level (e.g. for domestically listed companies)
or as regards whether the coexistence of two accounting referential at the level of a single
accounting domain is possible, or even desirable. This is because although conformity to
IFRS directives for example continues to be an existent fact in EU (and Ireland in
particular), the needs for measurement of harmonization at the national level can
fundament the compatibility direction of the accounting referral with the domestic one,
wherein the converse is very true.
Delineating levels and measurements of harmonization and convergences has
further been posited as benefic on several other accounts. These advantages as presented
by Mustata & Dumitru (2006) include the following: One, the legislative approaches of
each individual nation may have to be correlated to the real need of regulation that is
existent at a certain time. Two, the users of accounting information have the possibility of
taking into consideration all due factors considerations existent between the
manifestations of globalization and the national accounting standards. Three, based on

the tendencies and predictions made and established by means of measurement
indicators, investors are presented with a more accurate portrayal of the normalization
levels of national accounting settlements. Fourthly, the percentage modification of
indicators (as delineated above) from one year to the next helps highlight the evolutions
in the times of stability extents in referral to the national accounting standards. Lastly,
such financial modifications help establish the extents to which the national accounting
regulations are affected by the evolutions of the processes of global economy, especially
as concerns the globalization phenomenon and the international economic orientations
(Mustata & Dumitru, 2006).
An initial review of literature has suggested that although the requirements to
adopt IFRS/IAS 39 guidelines were vouched as benefic on several accounts, there were
fears on the challenges that these would present to the Irish companies. These largely
anchored from the observations that compared to the Irish GAAP; there were potentially
a number of measurement differentials in the financial statements and as regarding
disclosures. For example, the Price Water House Coopers (2008), have noted that the
requirements for full IFRS guidelines adoption would see majority of companies
experiencing a ‘different feel and look’ on their financial statements, largely as a direct
consequence of the key differences between the existing Irish GAAP and the proposed
new approaches based on the IFRS guidelines., and more specifically the IAS 39
guidelines. According to Fearnley & Hines (2005), it was estimated that over 7,000
listed companies in the EU would be affected as only 275 currently employed the IAS
guidelines at the time. Some of these would be based from UK and Ireland. The key
differences arose from certain poignant assets and liabilities recognition, measurement
and disclosure requirements.
It is therefore expected that the synopsis will enrich both academic and empirical
literature on several accounts: first, the widely held tenets for the mandatory requirements
in the adoption of IFRS/IAS 39 accounting standards is to improve international
compatibility of financial reporting (IASC, 2000). Given the perspectives, it would be
prudent to investigate the extent to which these noble initiatives have been realized or not
in Ireland. Another poignant issue has been the ongoing debates, especially as concerns
the impact of the so called IASB ‘fair value orientation’ and the IFRS/IAS 39 which
attests to fair value measurements (Cairns, 2007). In this regard, an assessment of these
two attributes impacts on the levels of measurements and reporting would be appreciated
as harmonization of accounting standards benefices are conceptualized. Lastly, an
assessment of the degrees of adoption of fair value measurement as opposed to historical
costs valuation method may help inform theory on the extent to which these two maybe
relevant to the capital market participants concerned with the impacts of IFRS adoption.
This information may be also of help to regulators, managers, investors and other
stakeholders. The robustness of the JACCARD test on the levels of compliance would
also help enrich theory by delineating the extent to which standardized accounting
standards are being employed in Ireland.
It is therefore intended that this paper will add to the growing literature on the
effects of IFRS and IAS 39 adoption in Europe, as the synopsis delves on an analysis and
tentatively articulates the effects of the mandatory adoption of these practices on the
compatibility of accounting information.

Chapter 2: Literature Review
2.1: Introduction
The determinants role in the evolution of harmonized accounting standards has been
the amplification for compatible accounting referents as a direct consequence of
globalization and economic integration processes. The key behind the mandated set of
harmonized accounting standards for listed companies in EU was to provide a level
playing field for participants in these capital markets by increasing the compatibility of
financial statements of publicly traded companies across Europe (Regulation (EC) No.
1606/2002, Par. 1). This would also accord financial market participants with comparable
financial statements and other reporting information that would further facilitate their
decision making where a single set of high quality accounting standards were in place
(Cascino and Gassen, 2009). This section will provide a brief but succinct review of
literature on the specifics of IAS 39 in the frameworks of the accounting harmonization
imperatives. The section will first dwell on the particular constructs of the complex IAS
39, financial instruments: Recognition and measurement before focusing on the
interrelationships between these accounting referents and the conceptualizations of the
‘fair value model’ in accounting domains. The synopses then delves into an analysis of
how the changing roles of the global economic orientations have necessitated the need for
fair value referents in the presentation of financial instruments and the underlying debates
on the benefic (or lack therefore) in such focus. The pinnacle of the debates presented
will largely incline into the multifaceted constructs of ‘relevance’ and ‘reliability’ of fair
value presentations. Within the microcosm of EU accounting harmonization, the analysis

of IAS adoption challenges will be disseminated by focusing attention on Ireland. A
highlight of prior research is given.
2.2. An overview of the IAS 39
International convergences and harmonization efforts are ventures that have been
driven by the need to develop in the public interest a single set of high quality,
understandable and enforceable global accounting standards that require high quality,
transparent and comparable information in its financial statements, and other financial
reporting in order to help participants in the world capital markets develop informed
decisions. The other principle objectives are to promote the use and application of those
standards and to bring about the convergences of national accounting standards and
towards high quality and benefic outcomes (Saudagaran, 2006). The major reasons why
IFRS/ IAS39 were considered beneficial were due to the facilitation to foreign capital
markets, improved credibility of supranational corporations on the domestic markets,
global compatibility of accounting data and information, increased levels of transparency,
and increased comprehensibility thanks to the availability of a common accounting
language, easier regulations on capital markets and reduced vulnerability of accounting
standards to political pressures (Strouhal, 2007).
The standards formulated by IASB have most commonly been referred to as
International Financial Reporting Standards (IFRS). The most commonly referred to
standards under this body have been IAS 39, financial instruments: recognition and
measurement and secondly, the IAS 32, financial instruments: disclosure and
presentation. The IAS 39 standards requires the utilization of fair values in the case of
certain financial instruments such as derivatives, shares and other securities whether held
for trading purposes or sale. This was to be a requirement by all European companies
listed in the EU markets following such a directive requiring all companies to harmonize
their accounts in line with the IFRS/IAS 39 guidelines by or before January, 1, 2005.
The requirements for listed companies in EU to adopt IFRS guidelines were
meant at enhancing the levels of compatibility and financial reporting quality among the
European nations by mandating a single set of accounting standards (Regulation (EC)
No. 1606/2002) as already outlined in the prior sections. This essentially related to two
levels of analysis. First, the standard level and the accounting information level which
has been referred to as the actual accounting outcomes resulting from the application of
the standards (Cassino and Gassen, 2008). This would lead to enhanced harmonization,
compatibility and convergence in the accounting arena. A definition of accounting
harmonization at the standards level (de jure or formal level) has been presented as a
process that leads to harmonized accounting standards, while at the accounting level, the
harmonization is not a strategy or an action but rather an effect (de factor, or material
harmonization) (Van der Tas, 1992). It has been noted by several authors that
harmonization in accounting practices increases the compatibility of accounting practices
(De Franco, Kothari and Verdi, 2008). In theory, harmonized accounting practices would
equate to homogeneous accounting of homogenous economic activities across firms
while heterogeneous activities would likewise be accounted for across heterogeneous
firms .Essentially, this would imply that where accounting outcomes are heterogeneous at
the firm level in different countries but this heterogeneity is more homogeneous across
countries after IFRS adoption, increases in cross-country homogeneity would be the case
(Cassino and Gassen, 2009).

The formulations of the above guidelines appear to have been initiated in December
2000, following the proposal by the Joint Working Group for an integrated and
harmonized standards for the application of the fair view to all financial instruments
(including deposits and loans) and independently from the purpose for which they were
held (Pita, & Gutierez, 2006: Armstrong, et al, 2008). Although the convergence towards
international standards had thus been set forth, the passing of the resolution by the
European parliament on Match 12, 2002 provided the clear commitment towards IFRS
adoption. Indeed, this was to gain momentum following the EFRAG issuance of its final
draft recommending that IFRS be endorsed en bloc (Armstrong, et.al, 2008). As noted by
Armstrong, et.al (2008), the views expressed by this body were that the adoption of these
guidelines would provide a common basis for financial reporting based on high quality
global standards that would also avail a platform for efficient cross-border investments
both within and beyond EU.
The debates that followed were structured around assessing whether the adoption of
the IFRS guidelines following the EFRAG recommendations inter. alia would be
attainable and indeed benefic. The need to factor and assess the concerns that this would
not be in the best interests of Europe needed a clear articulation. Thereinafter, the general
bearing was that even though concerns over the implementation of these directions could
not be wished away, the general consensus for harmonized accounting standards reigned
supreme. One major issue still outstanding as of the year 2003 was how to resolve the
controversial and multifaceted issues surrounding the fair value options and hedge
accounting requirements (Armstrong, et.al, 2008), meaning that the endorsement of IAS
32 and IAS 39 remained uncertain. These issues would finally be resolved when the fair
value options by July 8, 2005, which made the IFRS as endorsed in EU closer to IFRS as
issued in IFRS adoption (Armstrong, et.al, 2008).
2.3. The key provisions of IAS 39
The specific objectives of the IAS 39 guidelines were to establish the principles and
articulate a referral of guidelines that were to be followed by corporations that were
registered in the EU markets as regarding the recognition and measuring of financial
assets, financial liabilities and some contracts to buy or sell financial instruments. The
standards offered were specifically focused on creating guidelines on the initial
recognition of assets, de-recognition of financial liabilities, the initial measurement of
financial assets and liabilities, de-recognition of financial assets (after initial recognition),
subsequent measurement of financial assets, subsequent measurement of financial
liabilities, gains and losses, and the impairment and uncollectability of financial assets.
The following discussions shall present the details of the guidelines as contained in IAS
39 guidelines:
According to International Financial Reporting Standards [IFRS] (2008), the main
requirements for the recognition and measurement of the financial instruments are that an
entity shall categorize financial instruments as either; financial instruments or liabilities
at fair value through profit or loss, through two subcategories, that is, financial
instruments held for trading and financial instruments designated at fair value through
profit or loss. The other categorizations were either held to maturity investments, loans
and receivables or available for sale financial assets. The recognition of a financial asset
or liability was to be at the point where the entity becomes a party to contractual
provisions of the instrument. The other guidelines were on the reclassification of

financial instruments into or out of the fair value through profits or loss categories while
held or issued. The guidelines further required that the initial recognition of a financial
asset or liability through profit or loss be measured at fair value while other financial
instruments were to be measured at fair value plus the transaction costs that were directly
attributable to the acquisition or issue of the financial asset or liability (IFRS, 2008).
Following the initial recognition of an asset or liability, these were required to be
measured at fair value without deductions for expected transaction costs on disposal and
where the changes in value were again to be recognized at fair value in the profit (or
losses). Regarding held-to-maturity investments, these were to be measured at amortized
costs by employing the effective interests’ methods and where interests or impairment
costs were to be recognized in profits or losses. The guidelines for the loans and
receivables were that these be measured at amortized costs with interests and impairment
costs again recognized in profit or losses. The available-for-sale financial assets were to
be measured at fair value without any deductions for expected transaction costs on
disposal and the changes in fair value recognized directly in equity. The investments in
equity instruments that did not have quoted market prices in an active market and whose
fair value could thus not be accurately ascertained and/or reliably measured (in the case
of derivatives for example) were to be measured at costs. Hedged items on the other hand
were to be measured under the hedging accounting requirements (IFRS, 2008).
The guidelines for de-recognition of financial assets were the other key requirements
contained in the IAS 39 standards. According to these guidelines, financial assets were to
be de-recognized and subsequently removed from the balance sheets when the
contractual rights to the cash flows from the financial assets expired or the financial asset
was transferred (IFRS, 2008). For the purpose of these guidelines, an asset was to be
considered as transferred following an analysis of the firms’ extent to retain the risks and
rewards of ownership. The de-recognition of financial liabilities on the other hand
stemmed and applied when it was considered as distinguished, i.e. the obligation had
either been discharged, cancelled or expired (IFRS, 2008).
As regarding impairment, the guidelines were that entities assess at each reporting
date the objectivity that a financial asset or a group of assets were impaired. Financial
assets liable to impairments were considered as those assets carried at amortized costs,
carried at costs and available for sale financial assets. The IAS 39 guidelines
distinguished impairment from other declines in value, requiring that impairment testing
for all assets categories be done except for those measured at fair value through profits
and losses (IFRS, 2008). These exceptions were however excluded investments in
equities instruments that had initially been categorized as financial assets at fair value
through profits or loss and were subsequently measured at costs (IFRS, 2008).
Hedging accounting were the other guidelines contained in the IAS 39 standards.
According to IFRS (2008), three categories of assets (liabilities) qualified for a hedged
item; that is, a single asset, liability, firm commitment, highly probable forecast
transaction or net investment in a foreign operation, or secondly, a group of similar items
to the aforementioned or thirdly, or a portion of the portfolio of financial assets (or
liabilities) that share the risks being hedged. Three categories of hedging relations have
been specified under the IAS 39 guidelines as follows; fair value hedge, which is a hedge
of the exposure to changes in value of a recognized asset or liability or an unrecognized
firm commitment or an identified portion of an asset, liability or unrecognized firm

commitment or an identified portion of such an asset, liability or firm commitment that is
attributable to a particular risk and which could affect profit or loss (IFRS, 2008). The
gains (or losses) stemming from measuring the hedging instrument at fair value is to be
recognized in profit or loss. The other relationship was in cash flow hedge that relates to
a hedged item that is attributable to a particular risk associated with a recognized asset or
liability or a highly probable forecast transaction and one that could affect profits or
losses (IFRS, 2008). In the case of cash flow hedges, the portion of the gain or loss that is
effective is supposed to be recognized in equity whereas the ineffective portion is
recognized in profits or losses. The last category is a hedge of a net investment in foreign
operations and the treatments are similar to those of a cash flow hedge (IFRS, 2008).
2.4: The impact of IAS 39 for first time adoption
The adoption of the IAS 39 guidelines was to present many challenges to
companies in Europe adopting these guidelines for the first time, and more so for those
nations whose GAAP was at a variant with these guidelines. This largely stemmed from
the widespread variability that has characterized financial reporting in most of these
nations. Among EU nations, relevant cultures, social and economic diversities, are clearly
discernible, as an attribute of the typical proprietorship structure, average size of the
firms, the role played by financial institutions and the roles played by the investors and
financial capital markets (Catuogno, Mauro & Sansone, 2006). As noted by Alexander
and Nobes (2004), five key factors have been noted as influencing the development of
accounting standards in a country, that is, colonial and outside influences, providers of
finance, the nature of the legal systems, the influence of taxation and the strength of the
accounting profession.
The above characterized differences have been advanced in literature as having
varying magnitudes of influences. According to Nobes (1998) (as cited in Catuogno et al,
2006), the reporting in financial accounting may for example be dictated wholly by the
purpose for such information. In this regard, it is the financial system that can be
attributed as determining the purpose of the reporting that corporations are inclined to
adopt. The types of reporting systems in this subtext can either be capital market based
(where prices are established in active markets such as in US or UK), credit based:
governmental, (where resources are administered by the government, e.g. in France and
Japan) or credit based: financial systems (where banks and other financial institutions are
more dominant, such as in Germany) (Zysman, 1983, as cited in Catuogno et al, 2006).
Advancement to the above model has been presented by Nobes (1998) who
introduces the ‘insider-outsider’ financiers; wherein credit based systems are advanced as
being characterized by capital markets that are smaller and where corporations rely
mostly on banks to finance their capital requirements. In this regard, banks are viewed as
a major stakeholder, or what Nobles has referred to as weak-equity outsider. Market
based systems in contrast have a large number of shareholders (strong-equity outsider)
and hence there is more demand for public exposure given that most providers of finance
have limited involvement in management and no private access to financial information.
Based on this reasoning, Catuogno et al (2006) have conceptualized that EU nations
applying the IFRS/IAS39 guidelines characterized by strong equity outsider
characteristics would adopt a framework very similar to the IASB frameworks. However,
countries joining the weak-equity outsider frameworks (such as Ireland in this case)
would experience several implementation problems.

Other challenges towards harmonization of accounting standards have been
presented in literature. According to Street and Larson (2005), the main barriers to
convergence or harmonization at the level of EU are the links between financial
accounting standards and tax accounting, and disagreements over certain guidelines
especially those associated with fair value. The role of national politics has been another
key bottleneck in attaining accounting harmonization, largely as a construct of the
influences and pressures from the individual countries legislations. The enforcement of
compliance has also presented challenges, given the varying levels of compliance with
international standards. Indeed, it has been noted that despite companies’ claims of
compliance with majority of the guidelines set by these international bodies, closer
examination will attest that compliance has been selective with companies choosing what
to stick to and follow (Saudagaran, 2006). The academic and empirical literature has
suggested that the multifaceted issue of compliance to be exacerbated by the differences
in accounting frameworks and as advocated in the international standards at both the
national and international levels. As noted by Saudagaran, the usage of some concepts
requires that they are accurately contextualized as variant accounting products across
countries may arise despite the application of a common accounting standard.
2.5: Fair value accounting
2.5.1: Precedents of fair value accounting model
The paradigm shift towards fair value accounting and the adoption of IFRS/IAS
39 guidelines requiring all companies listed in the EU markets had been precedent by
needs to harmonize accounting standardization and reporting over the years. The need for
fair value referents appears to have been long in coming. As noted by Stroughal (2009),
references to standards of value appear to have taken root at the beginning of the 19th
century although these were not clearly defined at the time. The 20th century witnessed
courts, states and other regulations faced with difficulties in resolving litigations which
saw the need for explicit delineations of what fair value stood for. With more assets
taking a less tangible value orientation, the evaluation process had to change and hence
the increased need for fair value ascertaining criterions (Stroughal, 2009).
The period of the 1980 witnessed a rapid utilization of financial instruments
referred to as ‘derivatives’ to hedge against interest rates and exchange rates largely due
to three reasons; the abandoning of the systems of fixed exchange rates, the replacement
of interest rates by money supply as the instruments of control used by the monetary
authorities and finally, the utilization of these instruments by financial institutions as a
source of business with which to supplement their traditional activities (Pita, & Gutierez,
2006). The large scale utilization of these documents combined with the growing
importance of the capital markets as a source of investment and finance may be cited as
the precursor for the adoption of new accounting standards away from the traditional
practices. The traditional measurement of profit within the context of revaluations and in
accordance with the prudence concept for example meant that changes in value, other
than those resulting from transactions, were not considered as realized profits. This was
in line with the understanding that profits should only be recognized when the whole
production cycle was over and such profits could only be recognized when a sale or other
form of disposal occurred or there was an increase in liquid assets (Pita, & Gutierez,
2006). The widespread use of derivatives in the periods of 80s meant that accountants
were faced with the several obstacles in recognizing profits and the presentation of a true
and fair view of the financial statements on several accounts; first, there may have been
no costs incurred in trading with them. Such costs could have been ‘zero costs’ (for
example interest –rate swap contracts) and as a result could not be recorded on the basis
of their historic costs because, as noted by Pita, & Gutierez (2006)…’the existence of
fairly liquid markets and the development of valuation methodologies that were accepted
and used by the participants in financial markets to set the assets prices may have
undermined the credibility of the historic-cost based information about these instruments
given in the financial statements …..(p. 6).
Given the above perspectives, a lot of bodies in Europe and America were
interested in setting up financial standards that would eliminate the inconsistencies in
reporting of what were then commonly referred to as ‘off-the balance sheet transactions’
so that information on credit and market risks, treatment of financial coverage of arising
risks among others could be eliminated. The general bearing among these bodies was that
these could be attained through ‘a fair value’ presentation of financial instruments. The
applicability of these practices however generated (and still continues) to elicit much
debate. For example, it has been pointed out that this criteria allows increased levels of
subjectivity given that a fairly large proportion of financial instruments is estimated
especially as concerns those that do not have an active market, and which can as a result
lead to valuations and consequently unreliable financial instruments (Pita, & Gutierez,
2006). These issues are still hotly contested.
2.5.2: Definition
The definition of fair value as per the IAS 39 guidelines has been presented by
Demaria and Dufuor (2007) as ‘….the amount for which an asset or a liability could be
settled between knowledgeable, willing parties in an arm’s length transaction…..’ (p. 7).
According to Pita, & Gutierez (2006) this definition is very similar to FASB’s definition
which regards fair value as the total for which an asset can be sold in a real transaction
between independent parties undertaking the transaction in a situation other than that of
liquidation or forced sale. According to these authors, the later definition is in reference
to the going concern principle and pays cognizance to the need to distance fair value from
the value at liquidation. Obrien (2007) has noted that essentially, this is a market value
definition where, if available, the current market price for an item is said to be the best
estimate of its fair value. This point has been buttressed by Demaria and Dufuor (2007)
who contends that the fair value should represent the estimate of how much an asset or a
liability could be liquidated for in a transaction taking place under market conditions.
According to Barth et al (2001) as cited in Obrien (2007), ‘relevance’ means that the fair
value is capable of making a difference to the financial statements user’s decisions, while
‘reliability’ means that the reported fair value represents what is purported to be present
(p. 1). In theory, while the value of an asset (liability) may be easy to determine, they
should ideally have a fair value (Demaria & Dufuor, 2007).
The interpretation of the above definition has been analyzed in light of the IAS 39
guidelines by several researchers (see Demaria & Dufuor, 2007: Obrien, 2007: Pita, &
Gutierez, 2006: Armstrong, et.al, 2008). Demaria & Dufuor (2007) have elucidated that
the presentation of fair value as a measurement method to represent an economic way of
valuating capital, through the representation of ‘substance over form’ in the sense that
‘….faithful representation of real world economic phenomena is essential qualitative
characteristic, and which should essentially capture the substance of those economic
phenomena…’ (p. 7). In the authors’ opinion, the ‘substance over form’ gives the
primacy to economic characteristics on judicial form. In this regard, IAS/IFRS are
viewed in light of being shareholders centric as noted by the observations that given the
fact that shareholders are capital risk providers, financial statements that address their
needs by extrapolation would (and therefore should) meet the general financial needs of
other users. Thus, the penultimate presentation of a firm should be that capturing the
performance from an economic view and hence the need for a fair value presentation
(Demaria & Dufuor, 2007). In any case, it should be remembered that IASB does not
enforce a full fair value approach (Cainrs, 2006).
To a large extent, the mere definition alone has been a major area of contestation. An
interesting domain of discussions has especially veered towards the relevance of the
reported fair values. The hierarchy of the recognition criteria has presented another
bottleneck. According to Pita, & Gutierez (2006), the criteria within which to determine
the fair value requires assessments on three criterions; at the starting point, reliable values
from active markets should be applied. Failing this, valuation mechanisms should then be
applied. In the instances of where none of the above has been found fitting (and can thus
not be applied), presumed value or criteria should be applied. As regards an active
market, the criterion followed is one; the assets traded are uniform; secondly, buyers and
sellers willing to trade the assets are easily available and lastly, prices are public (Pita, &
Gutierez, 2006).
It has been advised that the definitions for the above criteria be recognized (and
therefore applied) within the contexts of the class of assets (or liabilities) under
consideration. In this regard, it should be understood that the requirements for uniformity
or published prices cannot (and therefore should not) mean the same thing where real
assets or intangibles are concerned for example when discussing financial assets. Not
withstanding the aforementioned, is the fact that it must be possible to carry out the
potential transaction without a significant time delay and that the price be accompanied
by at least a minimum trading volume (be representative) (Pita, & Gutierez, 2006). It
should be further noted that in the case of financial instruments, these will be listed
although the following holds; the converse is not necessarily true, the interpretation of
which is that a listed instrument does not necessarily have to have a secondary market.
Secondly, the prices need not be listed in an organized market. As regards publication for
prices, these must be accessible to operators without effort. As Armstrong (2007) and
Pita, & Gutierez (2006) elucidates, the depth of listing on a financial market implies that
the standardization of the asset must be virtually total, and in particular, prices from
wholesale or liquid markets may not be transferable to retail or non-liquid ones.
The philosophy behind the adoption of the fair value models as articulated by Pita,
and Gutierez (2006) and the explanations points at the starting point of IAS 39 as being
structured around three constructs: first, the existence published prices in an active
market ideally should present the best evidence of fair value and when in existence
should be used to value the financial asset or liability. In this subtext, the frameworks are
that a financial instrument should be quoted in an active market where the listed prices
are easily and regularly available. Secondly, in the instances of where the market for a
given financial instrument is not active, then an institution should ideally determine the
fair value of such an instrument by adopting a valuation technique that essentially
incorporates the overriding factors that participants in such a market look out for when
delineating the price and which are consistent and in tandem with accepted economic
methods used to set the prices of such financial instruments. Third, an institution should
be excluded from valuing an instrument at fair value when the ranges of acceptable
estimates are likely which cannot be reasonably estimated (Pita, & Gutierez, 2006).
The adoption of the fair valuation techniques will however vary as regards the
financial instruments in 4 key domain areas, that is, for the measurement of transactions
at initial recognition in the financial instruments, for the allocation of the initial amount at
which a transaction is recognized at its constituent parts, for the subsequent measurement
of assets and liabilities and in the determination of the recoverable amounts of assets
(Demaria & Dufuor, 2007). It should be understood however that the fair valuation
concept does not achieve unanimity. Thus, whereas on one side the historical costs have
not been considered capable of achieving the relevant quality of financial information
(Gerald, 2003 as cited in Demaria & Dufuor, 2007), the fair value accounting has been
cited as intensifying volatility and giving a value of breakage of financial institutions
(Earnst & Young, 2005: Bertoni & Derosa, 2005). In the opinions of Bertoni & Derosa
(2005), the implementation of the fair value concepts as detailed in the IAS 39 guidelines
presented interesting times for majority of firms, especially when it is considered that the
prevailing accounting frameworks in continental European nations meant a radical
change of perspectives for preparers and users alike.
2.5.3: Debates over the fair value model: The pros, cons, reliability and relevance
The adoption of the full fair value accounting techniques has been anchored on
the frameworks of presentation of all financial instruments at fair value and registering
any variations in their value immediately on the profit and loss accounts. The key
benefits in these ventures are on the perceived need for the presentation of a ‘truer and
fairer’ view of a firm/corporation real financial situation …’as only fair values can
adequately reflect prevailing economic conditions and the changes therein…’ (Pita &
Gutierez, 2006, p. 10). On requisite for these initiatives have been the observations that
the use of historical costs presents views of the conditions that existed when transactions
took place and in light of the fact that any changes in prices cannot be reflected in the
books of accounts until the asset is realized. It has further been advanced that the
widespread applicability of the fair values presents investors (and other stakeholders)
with a more consistent and comparable valuation framework in light of the fact that
financial instruments are being valued at the same time and in accordance with the
similar valuation principles. The arguments against the traditional valuation techniques
are that this limits the degree of comparison, as seen from the fact that two companies
with identical financial instruments, cash flows and risks, etc, could present variability in
valuation of the financial instruments as an attribute of the time bought (Pita & Gutierez,
2006).
The debates over the fair value model have largely been structured around the
advantages and disadvantages of the adoption of these concepts over and above the
historical costing techniques in the accounting practices especially as regards the
recognition and measurement of assets (and liabilities) following the IAS 39 guidelines.
Essentially, these have tended towards just how the use of these techniques would avail
more reliability to investors and just how relevant they would be. Mixed views appear to
dominate accounting literature on these aspects. The starting point of discussions

presented will be an analysis of the pros and cons, before the reliability and relevance
issues are disseminated.
2.5.3.1: Pros of the fair value model
Several pros of the fair value model have been presented in both academic and
empirical literature. According to Financial Stability Report (2008), one of the major pros
of the fair value model is that they are more predictable, in the sense that a fair value of
financial instruments represents market expectations as well as assessments especially as
regards amount, time and uncertainties of such instruments future cash flows. This is
because the use of such assessments takes into consideration the poignant elements that
affect market values (such as interest rates, exchange rates, credit etc) in relation to such
elements as demand and supply. This way, the values given for the financial instruments
are more predictable. Another advantage in the use of these models is that they increase
the levels of comparability between and among financial instruments given similarities in
economic characteristics. This is because fair value information normally reflects
judgments on the current value of expected future cash flows for related financial
instruments in the market (Financial Stability Report, 2008). In this way, such
instruments facilitate comparisons between financial instruments with similar
characteristics.
Several other advantages have been presented in literature. One such other advantage
is that the use of fair valuation avails more consistency with approaches of financial risk
management that is of further benefic to performance evaluation. According to the
Financial Stability Report (2008), given that fair values reflect the latest values of
financial instruments, the employment of the fair value approach helps to set and control
stop-loss limits for financial risk management which further enhances positively the
corporate internal performance. In this regard, the fair value accounting also accords
external financial users an objective evaluation of an entities performance. This is more
so when it is considered that financial reports are presented more fairly which further
promotes objective decision making. It should be considered for example that the fair
value technique requires firms and corporations to recognize effects of changes in fair
value in order to reflect off-balance sheet risks in time (especially as concerns
instruments such as derivatives) which means that financial reports are presented more
accurately.
2.5.3.2: Cons of the fair value model
Whereas several advantages are clearly discernible as seen from the above
discussions, the use of fair values techniques has also been flaunted with several
disadvantages. A fairly wide consensus abides as regards the appropriateness of applying
the criteria of fair value to instruments held in trading portfolio. In any case, this method
has been forcefully rejected for the valuation of the credit portfolios and financial
liabilities (Pita & Gutierez, 2006). One of the vehemently presented cons of the technique
is in regard to reliability, where this has been advanced as being too low. According to
Financial Stability Report (2008), financial instruments without market prices (due to an
inactive market or exhausted liquidity for example) should be valued by models.
However, it has been noted that given the high uncertainty of parameters as well as the
use of hypotheses and estimation deviations introduced by valuation models, their
effectiveness is limited. As regards comparability of financial information, several issues
become limiting where fair valuation is the case. This is because the use of these
techniques in some instances allows in some degrees of subjectivity in the preparation of
financial instruments that makes comparisons difficult on most occasions, and impossible
on some other instances. It has been pointed out that as corporations may favor different
models with substantially different assumptions in the determination of the fair values for
the different financial instruments, both the fair value and the implications for the
financial statements may present difficulties in comparisons. This is more so when it is
considered that there exist no definite measurement indicators for evaluation calibrations.
Another concern has been over just how these techniques allow for comparability of
financial statements among peers. It should be understood that on most occasions, the
classification of financial instruments in fair value accounting are to a large extent based
on corporate intentions and capabilities. Given these perspectives, it has been advanced in
literature that on most occasions, corporations who hold similar financial instruments
may be faced with inconsistent basis for subsequent measurements owing to
classification differences (Financial Stability Report, 2008). As a result, the use of these
valuation techniques may mean that the comparability of financial instruments becomes
unattainable among peers.
Other disadvantages of these techniques have been advanced by several authors. One
such disadvantage that has especially raised overwhelming debates in accounting
domains has centered on the question of whether the adoption of fair values has the
potential to increase volatility in financial statements with accompanying enhancement
effects of procyclicality (Armstrong, 2007). It has for example been pointed out that that
in the instances of where unrealized profits or losses are instantly recognized in income
statements or balance sheets, volatility in the financial instruments may be increased.

Another instance of this may arise where corporations distribute surplus earnings to
shareholders in the form of dividends based on the unrealized gains from assets
revaluations or from liability reductions, meaning that their financial structures may be
impaired. Given that fair value accounting is largely applicable to the measurement of
financial assets (and liabilities recognized as amortized costs), the inconsistent financial
accounting approaches may result in procyclical outcomes (Armstrong, et al, 2008). This
may for example be experienced during economic recessions where the employment of
fair value measurements may precursor drastic reduction of corporate values which may,
on the extreme end, trigger some contagion effects. Lastly, it has been advanced that the
use of fair value techniques are flaunt with over flexibility that may make fair value
measurements easily manipulated. This means that the easy manipulation of financial
instruments makes a fair value reflection of real values subjective, with accompanying
erosion in the quality of financial statements information.
2.5.3.3: Debates of over the relevance and reliability of fair value accounting
The relevance of the reported fair values is an element that has received extensive
coverage from several authors. According to Obrien (2007), the conjecture of what
underlies relevance is anchored on the observations that market object values are
objective measures of value and can by extrapolation be obtained from markets where the
instruments are being traded. Adopting similar reasoning, it would be prudent to intone
that exchange values can be closely approximated by reference to market information
and, consequently, the use of valuation models. In this subtext, historical costing would
(while presenting a more reliable cost measure) lack the relevance of current exchange
values to the primary users of financial statements (Armstrong, et.al, 2008). These
observations have gained support from Obrien (2007) who notes that current exchange
values of a corporations (firms) assets better reflect the assets contribution to the current
market values on the claims on the firms’ earnings. Given these perspectives, one can
attest that fair values present investors (and other stakeholders with aligned interests)
with undoubtedly more useful information than would historical costs especially as
regards the determinants of their investments. But while this (in theory) would accord
investors a fair presentation, and consequently better informed decision making, the
existence for the same has been extensively questioned in both academic and theoretical
literature. The assessment of the applications has largely remained in the annuls of
regressions of firms equity values on reported fair values, with controls for historical
costs and other variables (O’Brien, 2007) which have generated mixed results. As several
authors have noted, these regressions are usually subject to varying interpretations (most
of them subjective) which limits conclusive delineations of the relevance, benefits and
usefulness of full fair value accounting as opposed to historical costs.
The relevance of the fair value technique within the banking sector contexts has for
example elicited criticism for their applicability, especially as regards the credit
portfolios. Credit portfolio are the financial instruments held on the balance sheet until
their maturity and which generate yields over time as a result of the differences between
the costs of financing and the amounts charged to the customers, in the banking contexts.
Given these circumstances, the determinants of returns are grounded on whether or not
payments are made. In such circumstances, it can be argued that the historical costs
provide more reliable information on whether such payments are being made or not. As
Pita & Gutierez (2006) elucidates, the fair value method gets away from the process of
generation of returns and cash flows and succeeds in offering results that have more to do
with the opportunity costs as opposed to the essence of banking business. This becomes
more poignant when it is observed that the fair value of assets obviously fluctuates over
time. If such assets are not sold or redeemed early then registering them in profits and
losses distorts the profits presented and has the more poignant effect of introducing a
fictious volatility (Pita & Gutierez, 2006).
Another major area for the fair value criticism arises from the trading of financial
instruments, where it has been noted that the fair value is the most significant value with
which to record them on the balance sheet and that their valuations in value must be
reflected in the profit and loss statements. However, Pita & Gutierez (2006) has noted
that discrepancies will arise where attempts are made to delimit the contents of the
trading portfolio.
The issue of reliability has been the other front for criticism of the fair value models.
According to Pita & Gutierez (2006), accounting information is considered relevant when
it truly reflects the economic reality of a transaction…’regardless of its legal form, as
well as being prudent, complete and free from distortions….’ (p. 11). Given these
perspectives, it has been advanced that fair values should not be applied to all financial
instruments, given that obtaining reliable values may not be easily possible, especially
where no active markets are available or where valuation techniques for estimating value
are unavailable. Similar contentions would reign supreme where it is noted that external
auditors are presented with difficulties in verifying if indeed values obtained using fair
valuations are indeed reliable.

The centrality of concern continues to be the relevance and reliability of full fair
value accounting over and above historical costing. Conceptualizing the reliability and
relevance of fair values through the regressions is limited on several accounts. For
example, do weak results posit the idea that the markets do not find fair value relevant to
the decisions articulated or the non-reliability of information presented?. This becomes
more poignant when it’s considered that equity values are more often than not related to
all the positions in the balance sheets hence making accounting for everything quite
unattainable. In any case, assets that represent the core values of a firm may not be
balance sheet items which further exuberates the ability to mitigate their influence on the
equity values. As O’Brien (2007) articulates, ‘….omitted on-and –off-balance sheet
assets or liabilities that are correlated with the reported fair values will bias the estimated
relation between market equity values and the reported fair values…..’ (p. 2). Indeed,
these sentiments are supported empirically. For example, Eccher et al (1996) and Nelson
(2006) as cited in O’Brien (2007) have reported mixed results based on regression results
on the significance of regression coefficients for loan fair values. Contrast this with the
empirical documentations of Bath, Beaver and Landsman (1996) whose fair value loans
relevance yields highly strong correlations. Other findings have generated mixed results
on the employment of regressions in tests of fair value accounting models on other
elements such as securities. For example, Bath et al (1996) have reported quite
insignificant coefficients for securities investments fair values and mostly smaller
coefficients than for loan values (O’Brien, 2007). Similarly, Bath (1994) also report
inconsistent results in their studies on significance of banks securities gains and losses on
bank stock returns (cited in O’Brien, 2007). While subsequent analysis of the findings
presented in this study have been analyzed by other researchers with clear highlights of
the study limitations in delineating the biases reported, the clear congregation has been
that the reliance on regression models present limitations in assessing the reliability of
the fair value accounting models and their application in practice. Indeed, the reigning
paradigm is quite chaotic.
O’Brien (2007) has observed that the equity relevance tests and the relevance
criterion adopted by the accounting bodies has erred in their failure to pay cognizance to
whether the reported fair values are or will be used appropriately. As the author has
noted, this failure limits the ability to assess their applicability in use. He goes on further
to note that most of their arguments are couched in terms of excess volatility ‘ …being
introduced in bank earnings that include fair value gains and losses on loans that are held
to maturity…..’ (p. 4). The author’s observations that implicit in the arguments is the fact
that the market or other stakeholders will not correctly interpret and/or react to increases
in reported earnings volatility due to the inclusion of fair values gains and losses, have
been shared by several other researchers (see Bath et al, 1996: Pita, & Gutierez, 2006:
Demaria & Dufuor, 2007: Cainrs, 2006: Armstrong, et.al, 2008).
2.6: Institutional background in Ireland: Towards the application of international
accounting standards
2.6.1: Common Law accounting frameworks
Ireland is a common law country a common law country, has been posited as
characterized by wider ownership structures, separation between ownership and control,
investors oriented, and with weak influences over banks and other financial institutions,
as opposed to civil law nations that have more concentrated ownership structures,
financial structures highly based on debts, creditors orientations, dependency on banks as
the main sources of financing, and underdeveloped financial capital markets (Catuogno,
et al 2006). As noted by these authors, the traditional accounting systems have been to a
large extent investors oriented, adopted historical costing as the coherent basis for
measurement of financial instruments and as being highly dependent on accounting
conservatism and prudence. A general observation has been that the international
accounting standards have tended to reflect the Anglo-Saxon systems that are largely
investor centric. Both academic and empirical literature advances that the underlying
objective of the financial instruments are to present financial information about an entity
that will help them make informed decision. However, for a long time, financial
information had been prepared on an accrual basis of accounting. The requirements for
Ireland companies to conform to the IFRS/IAS39 guidelines were vaunt to present many
challenges within the national accounting frameworks, largely due to variations between
the international accounting systems and the Ireland accounting systems (Thornton,
2009), especially as concerned the fair value accounting systems that formed the pinnacle
of the new guidelines.
2.6.2: The accounting framework in Ireland
The accounting framework in Ireland follows the UK GAAP. The guidelines of
these were presented by the Accounting Standards Board (2004) in the note on the
application of IAS 39, financial instruments: Recognition and measurement for entities in
the UK and the Republic of Ireland preparing their financial statements in accordance
with the EU-adopted IFRSs, beginning on or before 1, January, 2005. Fearnley and Hines
(2005) have pointed out that majority of companies were required to comply as most of
the provisions in the GAAP applied to all the companies regardless of size.
The accounting regulatory framework in UK has been structured around the 1985
Act of companies which requires companies to present a true and fair value of the
financial statements. The Financial Reporting Council of `1990 is the body mandated
with setting up the accounting standards in the country, which is an independent private
sector body, funded by the accountancy profession, the department of Trade and Industry
and the city institutions (Fearnley & Hines, 2005). This body is comprised of three
subsidiary bodies, that is, the Accounting Standards Board (ASB) (responsible for
promulgation of accounting standards), the Urgent Issues Task force (UITF) (which
provides the authoritative guidelines on emerging accounting issues for which no
standards are in existence) and the Financial Reporting Review Panel (FRRP) (which is
responsible for enforcement of compliance to accounting standards) (Fearnley & Hines,
2005). According to the Combined Committee of Accounting Bodies [CCAB] (1988), the
ASB should set out explicitly the accounting standards linked to the underlying principles
but should not produce too large a number of accounting standards as to cover all facets
in accounting. Fearnley, Hines, McBride and Brandt (2000) have reported that FRRPs
initiatives’ can be credited with the improved quality of financial reporting in UK.
The UK domestic companies that are publicly listed on the London Stock
Exchange (and Dublin Stock Exchange in the case of Ireland) are required to comply
with the regulations issued by the UK Listing Authority in addition to the UK GAAP
(Fearnley & Hines, 2005). Under the requirements to fully adopt IFRS guidelines for the
publicly traded companies, several impacts were anticipated. For the purpose of these
guidelines, an entity was deemed to be publicly accountable where two criterions were
met; first, its debts or equity instruments are traded in a public market or its in the process
of issuing such instruments for trading in a public market, or, it is a deposit taking entity
and/or holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary business. Such circumstances would hold for banks, credit unions, insurance
companies, securities broker/dealer, mutual funds or investment banks (Price Water
House Coopers, 2008).
Although the requirements to adopt IFRS/IAS 39 guidelines were vouched as
benefic on several accounts, there were fears on the challenges that these would present
to the Irish companies. These largely stemmed from the observations that compared to
the Irish GAAP; there were potentially a number of measurement differences in the
financial statements and as regarding disclosures. For example, the Price Water House
Coopers (2008), have noted that the requirements for full IFRS guidelines adoption
would see majority of companies experiencing a ‘different feel and look’ on their
financial statements, largely as a direct consequence of the key differences between the
existing Irish GAAP and the proposed new approaches based on the IFRS guidelines.
According to Fearnley and Hines (2005), it was estimated that over 7,000 listed
companies in the EU would be affected as only 275 currently employed the IAS
guidelines at the time. Some of these would be based from UK and Ireland. The key
differences arose from certain poignant assets and liabilities recognition, measurement
and disclosure requirements.
The existing Irish GAAP and the new guidelines differed on several accounts. As
regards tangible and fixed assets for example, the Irish GAAP presented a choice of
carrying them at historical costs or at valuation in each case less the accumulated
depreciation and impairment losses. The IFRS guidelines required that these be evaluated
at fair value. The requirements for the intangible assets on the other hand were such that
although the guidelines were that they be readily ascertainable at market value before
they can be recognized, this rarely happened in practice (Price Water House Coopers,
2008). Other differences could be discerned as concerned development costs for example,
where according to the Irish GAAP, the choice was to either capitalize development
expenditure that met certain criteria or recognize such expenditure as an expense,
whereas these were not to be expensed under the IFRS. Regarding borrowing costs, the
choice of capitalizing finance costs that were directly attributable to the construction of a
tangible asset or recognizing such finance costs immediately in the profit and loss
accounts, under the national GAAP, were different from the IFRS guidelines where all
such finance costs were expensed. Differences on consolidations, mergers and
acquisitions were such that, depending on the circumstances, either acquisitions or
merger accounting was to be applied, with exemptions for the small and medium sized
firms. The IFRS guidelines were different as the purchase method was to be applied to all
acquisitions and where merger accounting was not to be permitted. Other clear
demarcations could be seen in the joint venture and associate accounting, deferred taxes,
employees’ benefits etc, between the Irish GAAP and the IFRS guidelines that were
feared as materially affecting the financial statements (Price Water House Coopers,
2008).
The more poignant IAS 39, Recognition and Measurement guidelines were to
present further differences with respect to the local GAAP, especially as concerned the
fair value criterions for recognition and measurement of financial instruments. As noted
by Pierce and Weetman (2002) the international accounting system was going to incline
to a more and more fair value oriented with constant references to market evaluations.
This was more so when it is considered that for the EU nations, the board of IASC had
articulated that where a conflict arose between the nations’ accounting frameworks and
the new international accounting standards, the latter would reign supreme (Catuogno, et
al, 2006). These authors have noted that in most countries, the major changes that would
be experienced lied generally in the different concerns over market reference to fair
valuation of assets and liabilities.
Price water House Coopers (2007) have noted that prior to the publication of FRS
26, there was no UK standard that comprehensively accounting for financial instruments,
as can be seen from the fact that FRS 5 covered recognition and de-recognition but
specifically scoped out derivatives. While FRS 26 derived from the IAS 39, the initial
version of the standard did not include the initial recognition and de-recognition material
in IAS 39 and its scope was considerably lower relative to the IAS 39. For listed
companies, the initial version of FRS 26 applied for the accounting periods starting 1,
January, 2005. The definition of the financial instruments as encapsulated in the IAS 39
were wide and expansive, including cash, debt and equity investments, loans, trade
receivables and payables, certain provisions and derivatives (including embedded
derivatives). The assets and liabilities were required to be measured at fair values or
amortized costs depending on which category definition as under the IAS 39 guidelines
(Price water House Coopers, 2007). As concerned all the derivative financial instruments,
(including embedded derivatives), these were required to be recognized in the balance

sheets at fair value. The changes in fair value of derivatives that were not hedging
instruments were to be recognized in the income and expenditure accounts or income
statements (Price water House Coopers, 2007).
In the case of UK (and Ireland for that matter), the accounting systems were
structured around historical costing to which reference to the market was allowed largely
in line with the legal prescriptions of prudence (as it prevailed over the accrual concepts)
but no revaluations to accomplish the current market value was allowed unless authorized
by specific laws (Price Water House Coopers, 2008) and as Catuogno, et al (2006)
elucidates, the substance over form prevailed in the accounting representation of
economic matters especially as concerned consolidation purposes. In this regard, it
should be noted that the traditional focus on prudence as an inherent characteristic of
financial instruments was broken in the representation of the concept of income, and
where unrealized revenues were to be generally recognized in the income statements as
an integral part of the financial performance of an entity. Conversely, although the
international accounting setting has been advanced as following the common law
countries (Anglo Saxon countries such as UK and US) accounting tradition as
contraposed with to the civil law countries (continental countries) (Catuogno, et al,
2006), a lot of changes and challenges were anticipated.
2.7: Prior research on accounting harmonization and fair value accounting
Prior research on the adoption of IAS 39/IFRS by the European nations has
veered towards investigating the implications of these set of standards within the
frameworks of two major approaches; the first group focuses on the transition and
implementation of IFRS/IAS, particularly the effects on firms (Jermakowicz, 2004; Street

& Larson, 2004; Sucher and Jindrichovska, 2004; Vellam, 2004) and for the local and
international regulators (Weißenberger et al., 2004; Haller and Eierle, 2004; Shipper,
2005; Whittington, 2005). The second category on the other hand focuses on the financial
reporting under IFRS/IAS with reference to compliance to these standards (Emenyonu &
Gray, 1996; Dumontier and Raffounier, 1998) and the quality of information under the
two guidelines (Ashbaugh &Pincus, 2001; Hung & ubramanyam, 2004; Van Tendeloo &
Vanstraelen, 2005).
The early studies on these fields have demonstrated that, to a large extent, the
preparation of accounting information for the purposes of taxation may have been the
major bottleneck in achieving standardization among continental European companies
that essentially failed short of IAS/IFRS reporting orientations (Nobes, 1983). This
observations have gained support from the works of Street and Larson (2004) who, based
on a survey of EU nations on plans and barriers to convergence to IAS/IFRS in 2005,
demonstrates that majority of companies did not plan to converge national GAAP to the
new mandatory guidelines, while stressing that after the adoption, they might maintain
the two accounting systems for individual accounts. The authors note that the major
impediments as regards adoption were the difficulties stemming from application of
IAS/IFRS guidelines and the tax systems of the respective countries as well as the
absence of guidelines from the national bodies in the application of such standards.
Further support for these has been well documented from the findings of Sucher and
Jindrichovska (2004) based on a survey of Czech Republic adoption of these mandatory
requirements. The authors confirm that although the nations accounting systems were
moving closer to the IAS/IFRS in some areas (valuation at fair value for example),
insurmountable differences still abided on tax and financial reporting regimes, which to a
large extent explained the variations observed between the two systems.
Given the apparent non-conformities as regards the financial reporting and tax
regimes, Vellam (2004) conceptualizes the possibilities of attaining convergence between
GAAP and IAS/IFRS guidelines among Polish firms and notes that the preference of
Polish accounting system for a tax orientation and the lack of an effective enforcement of
international accounting standards to be the major bottlenecks. Similar findings have
been presented among Belgium firms following the works of Jermakowicz (2004) who
observes that the major differences between the two sets of standards to be directly
attributable to the tax nature of the nation’s accounting rules and the inadequacy of
implementation guidelines that creates possibilities for IAS/IFRS interpretation risks. His
observation reinforces the widely held tenets that these standards implementation may be
a major issue among companies across Europe. As Weißenberger et al. (2004) observes
abut German firms, the motives that have driven the change to an international regime
may not play an important role in attaining seamless transition to IAS/IFRS largely due to
the fact that reporting and business objectives fails to be in tandem. This has gained
support from Haller and Eirle (2004) who again notes that a complete change to the
German accounting systems needs to be undertaken through a step by step revision of
existing rules if harmony with IAS/IFRS is to be attained.
An analysis of the above sentiments would indicate the congruency among
researchers on the lack of harmony between GAAP and IAS/IFRS guidelines indicating
that the regulatory changes may have generated some interesting issues for debate
especially as regards financial reporting outcomes and the implications for international
convergences for financial reporting. An observation by Shipper (2005) is that the
mandatory adoption of IAS/IFRS by European firms presents an opportunity for merging
these variances by removing the several differences between the different accounting
principles so as to avail more comparable financial information. An in-depth analysis of
this has been documented in the works of Whittington (2005) who has observed that
convergence can be attained between IASB and FASB through the development of fair
value measures (e.g. The application of hedge accounting) and the treatment of business
combination as an acquisition which would preclude the application of pooling of interest
accounting (Cordozza, 2008).
The implications of the applications of IAS/IFRS among EU nations has also
received attention by researchers who have tried to decipher the potential effects of such
accounting choices and the motivators for the same, the characteristics of adopting
countries and the consequences of their adoptions on the business performances
(Cordozza, 2008). For example, the extent to which the accounting measures and
associated disclosure of European companies applying IAS and the levels of international
harmonization, and the incentives plus accompanying characteristics of companies
complying with international accounting, has been carried out by several authors
(Emenyonu & Gray,1996: Dumontier & Raffounier, 1998: El-Gazzar et al.1999). The
general concurrence among these researchers is that the decisions on whether to apply
IAS is to a large extent significantly associated with financing policy and performance,
foreign operations and multiple international listings. These findings have gained support
from other researchers (see Bryant, 2000: Ashbaugh, 2001) who have advanced that
companies that traded in US financial markets disclosed IAS or US GAAP financial

information as they could provide more standardized information as contrasted with that
prepared under national GAAP. Indeed, documented evidence abides suggesting that the
benefits of IAS adoption are more relevant in those countries national regulators and
standard setters required companies to attain more comparable financial information by
applying IAS or US GAAP (Glaum & Street, 2003: Tarca, 2004: Cuijpers & Buijink,
2005).
According to an extensive study by Ashbaugh and Pincus (2001) on whether the
observed differences between domestic accounting standards and the international ones
do influence the financial analysts’ forecast of earnings, empirical analysis indicated that
indeed positive and significant differences abode, and that convergences in accounting
policies by applying IAS could ameliorate analysts forecast errors and increase the
quality of earnings. These supposed benefits of IAS standards adoption have been
empirically ascertained by several other authors. It has for example been advanced that
high quality accounting standards can moderate high quality information released by
corporations and consequently value relevance enhancement of financial statements
release (Hung & Subramanyam, 2004: Barth et al., 2005: Van Tendeloo & Vanstraelen,
2005).
Other researchers have focused on accounting harmonization in trying to decipher
answers to three principle questions, that is, is the need for harmonized accounting
standards, the most favorable factors and obstructive factors to the harmonization
process, and lastly, the degree to which these supposedly harmonized accounting
practices being practiced (Herrmann & Thomas 1995). Other authors (see Aisbitt, 2001;
Emenyonu & Grey, 1992 & 1996; Herman & Thomas, 1995) have concentrated on 2
principle aspects, i.e., the reliability and correctness of the evaluation. Alexander &
Nobes (2004) have for example assessed how these two aspects are shaped by the
colonial and external influences, impact of capital providers, character of the legal
systems, impact of taxation, and the impact of the accounting profession.
2.8. Summary of literature reviewed
The adoption of IAS 39/IFRS presented an essential element to attain integrated,
competitive and attractive European capital markets. This impelled the European
commission to introduce the set of accounting standards for all listed in the EU stock
markets. Prior to the adoption of IAS 39/ IFRS listed companies in EU nations were
required to present their consolidated financial statements in accordance with the national
company’s laws, domestic accounting standards and stock exchange requirements. The
adoption of the fair value measurements have however led to suggestions that this form
of measurements would be more pervasive under the IASB standards compared to the EU
nation’s GAAP. To a large extent, there are discernible demarcations in understanding
between the varying schools of thoughts.
From a purely theoretical perspective, it may be plausible to state that a
harmonized set of accounting standards would induce comparable accounting outcomes,
but as Watts and Zimmerman (1995) have warned, financial reporting processes are
shaped by accounting standards as well as by the economic incentives of managers,
auditors and other market participants as well, not just the public oversight bodies. It has
further been advanced that political and economic factor do influence financial
measurement practices as dictated by the local and capital markets which are largely un-
integrated. This would imply that the same factors applicability in the past which largely
resulted in differences in the accounting systems in individual nations to continue
impinging on the accounting harmonization among the EU nations. It has further been
pointed out that effective worldwide enforcement mechanism for harmonized accounting
standards will continue to be influenced to a large extent by the local economic and
political factors.
It should be borne in mind however that the current levels of economic
globalization requires that increased accountability in financial reporting be incorporated
within the frameworks of financial reporting that encapsulates accounting harmonization,
increased reliability, credibility and comparability of financial information at the global
arena.
Chapter 3: Research methodology
3.1: Introduction
The study was aimed at assessing the level of compliance of companies listed in
the Irish stock exchange in 2005 with the requirement to prepare accounts in accordance
with IAS 39 as adopted by the companies listed in the Dublin stock exchange in Ireland.
Towards this, the paper developed a diagnosis of the Ireland accounting system and the
levels of compliance with the IAS 39, financial instruments: recognition and
measurement. The study employed a quantitative research design and involved a
descriptive analysis of the considered variables in the study. The quintessence of the
research methodology was based on the mutual relationship between information
provided in the financial reports for the companies listed in the Dublin stock exchange as
of 2005 and reporting requirements in the IAS 39 guidelines. An empirical analysis was
then based on the harmonization measurement levels by employing the JACCARD index.
The following section will cover the research design employed in the study, the
hypothesis posited, sampling and sample analysis;
3.2: Research design
It has been advanced in literature that measurement of harmonization levels can
be computed in different ways. According to Catuogno, et al (2006), most of the research
performed in the area of financial accounting harmonization has mainly been focused in
the use of index measures. As noted from the discussions in literature earlier presented, a
distinction between de jure harmonization and de-facto harmonization can be ascertained
(Van der Tas, 1988: Tay and Parker, 1990: Cordozza, 2008: Catuogno, et al, 2006). The
current study could be classified as measurement harmonization as detailed in Catuogno,
et al (2006), Measurement of De-facto harmonization: the case of participating
investments in Italy. The measurement harmonization indices have been developed by
several researchers (Van der Tas, 1988: Tay & Parker, 1990: Cordozza, 2008: Catuogno,
et al, 2006). Van der Tas (1988) has for example presented a statistical test to measure
harmonization; the Herfindahl index (H index). In the index according to Van der Tas,
the H index is focused on quantifying the degree of harmony of financial reporting
practice for each item in the annual accounts; the introduction of mandatory provisions
concerning financial reporting could create fluctuations in the degree of harmony
(Catuogno, et al, 2006). Catuogno et. al (2006) have noted that while this index is
relatively simple to apply, a limitation has been that it can only be applied in measuring
the levels of harmonization in one country alone. Consequently, the authors have
introduced I index and comparability index to measure ‘within’ and ‘between’ countries
harmonization levels (Catuogno et. al, 2006: Van der Tas, 1988, 1992). As noted by these
researchers, the H and C indices can be used to measure harmony within countries,
whereas I and C between countries can be used to measure harmony between two or
more nations. The modifications to the above indices have been presented by several
other researchers in later years (see Ionascu, 2003: Mustata & Dumitru, 2006).
Another index that can be utilized in the measurement of harmonization has been
the JAACARD index. As noted by stroughal (2009), the most frequently used methods in
trade literature where an analysis at the level of accounting regulations are required has
been the jaccard’s association coefficients. As noted by this author, ‘the two considered
coefficients offers the possibility of quantifying both the association degree and the
dissimilarity degree between different sets of accounting standards taken into
consideration for analysis of harmonization levels……’ (p. 356). Morais and Fialho
(2008) have extensively employed this method in determining the levels of
harmonization between IAS 39 and the financial reporting practices based on a broad
sample of European listed companies in 2005 in their study. In the current study, the
Jaccard index was employed in measuring the levels of harmonization with the
accounting standards IAS 39, financial instruments: recognition and measurement,
following the advice given by Morais and Fialho (2008), Stroughal (2009), and Rahman
et al (2002).
3.3: Research hypotheses
Three hypotheses were initially developed to guide analysis. These are discussed
below:
According to Al-Shammari et al (2008), it is a common observation that entities
in a given industry may comply more closely with particular IFRS that is more applicable
to their activities. As regards the levels of compliance between institutions in the
financial sector, production and construction, Investment and services sector, and
technology and communication, we can posit the hypotheses;
H1: the levels of compliance with IAS 39 will differ as an attribute of sector
categorization for the Ireland companies
It has been pointed out by several researchers that the size of a company to be a
critical determinant on whether it will comply with standardized requirements or not. A
hypothesis depicting the expected relations between small and larger corporations can be
developed as follows:
H2: the levels of compliance with IAS 39 will be more stringent (higher) in larger
as opposed to smaller companies for the companies listed in Ireland stock exchange
According to Morais and Fialho (2008), the number of auditor may influence the
level of compliance, wherein it is seen that corporations audited by the big four auditors
are seen to have more stringent in enforcing accounting guidelines. Based on the same
reasoning, we can stipulate that auditors may influence compliance and henceforth posit
the hypothesis:
H3: the level of compliance with IAS 39 will be higher in companies that have
been audited by the big four auditors will show higher compliance
3.4: Samples and samples analysis
The study was aimed at assessing the level of compliance of companies listed in
the Irish stock exchange in 2005 with the requirement to prepare accounts in accordance
with IAS 39 as adopted by the companies listed in the Dublin stock exchange in Ireland.
Data was obtained from the annual reports for the effective date (2005) and in the
subsequent periods for the companies that had indicated that they had postponed the
adoption period. These were observed to be 66 companies but the sample taken
eliminated 12 companies for which the data was not available, meaning that 54
companies formed the basis of the study. The collection of data was done following the
advice given by Morais and Fialho (2008) and this involved manually checking all the
financial statements for the companies to see the recognition and measurement of
financial instruments. The designation was determined by comparing the notes to the
financial statements and where such did not expressly state the measurement method, the
balance sheet was compared to these notes. The manners of recognition and measurement
of financial instruments was compared to the IAS 39 guidelines (Morais and Fialho,
2008).
The companies were divided into four industry sectors designated as follows:
financial; production, construction and industrial; services and investments; and finally
technology and telecommunication (see table 1, below). Most of the companies fell in
these four broad categories and it was hence felt prudent to group them in the four
categories. Other studies (see Morais & Fialho, 2008) have broadly classified companies
into two sectors (financial and non financial). However, in this study, a broader
categorization was found desirable in order to see whether variations in these categories
were the case, as opposed to just financial and non financial categorizations adopted in
most studies.
Table 1: Sector categorization
Industry sector Number of companies

Financial 6
Production,construction and industrial 25
Service industry and investment 15
Technology and Telecommunications 7
Total 54
To assess the levels of compliance, the checklist adopted by Morais and Fialho
(2008) was utilized (see appendix 1). The checklist included 54 aspects that are …’core
to the methods used in measurement of financial instruments….’ (Morais & Fialho, 2008,
p.229). The checklist employs a coding system for these items with “1” representing the
methods prescribed by IAS39 and accepted by the EU and “0” for those “methods not
allowed by IAS 39 [but] adopted by EU” (p.229). The methods applied by specific
companies were indicated by a “1” while those not adopted by the companies were
designated as “0” in the respective columns and corresponding rows. The criterion
adopted was the designation with a “0” to denote methods not adopted by companies, “1”
denoted those that were adopted by the companies, “NP” represented the items the
companies failed to comment on the existence of such disclosure items and “NA” where
companies did not possess such measurement items.
The Jaccard index was calculated via a 2*2 table adopted from Moralis and Fiahlo
(2008). The figure comprises of two indicators “1” and “0” for each company. The
number of times when the company adopted the methods that IAS 39 allowed (1,1) were
denoted by “a”, the counts for the mismatches when the company did not employ
measurement methods prescribed by IAS 39 (1,0) were denoted by “b”; the number of
mismatches when the company adopted a specific measurement method not prescribed
by IAS 39 (0,1) were denoted by “d” . The Jaccard (JACC) index was a measure of the
similarity between the methods recommended by the standard and those adopted by
individual companies. The bigger the index value the level of compliance was noted to be
higher.
Figure 1: A 2*2 table for Jaccard index calculation for each company and the
formula used in calculating the index (Moralis & Fiahlo, 2008, p.230)
Chapter 4: Results and Discussions
4.1: Introduction
The purpose of this study was investigate the levels of compliance with IFRS/IAS
39 accounting guidelines, and was focused on an empirical investigation of Ireland’s
company’s compliance levels. The results of this study have been presented in this
chapter. The chapter starts by providing descriptive statistics of the analysis based on
industry sector, Auditor country and size. The observed differences are then tested for
significance by first using the t-test statistic, before the employment of a stronger JAAC
logarithmic regression analysis of the variable ( Morais & Fialho, 2008).
4.2: Descriptive statistics
The individual company JAAC index has been presented in appendix 1. A
summary of these descriptive statistics by industry sector when the tool was employed
have been presented in table 2 below. The overall Jaccard index computed was found to
be at a mean of 0.4337. The highest value scored was 0.739130435 whereas the lowest
value was found to be 0.214285714. This low mean value was reported in 15 companies,
representing 28% of the companies analyzed. None of the companies’ analyzed revealed
total compliance (mean of 1). The total number of companies with a mean value higher
than 0.5000 were found to be 23 (representing 43% of companies) intimating that most of
the companies were revealing very low compliance levels as of the year 2005. Indeed, the
overall Jaccard index for the companies listed in the Dublin stock exchange was found to
be relatively low as compared to other countries as documented by Morais & Fialho
(2008).
In their study on the levels of compliance with IAS 39 guidelines on a total
sample of 220 companies in five EU nations (UK, Italy, Germany, Spain and Portugal),
UK firms had been reported to have high levels of compliance at a high 0.887, followed
by Italian companies (0.871), Portuguese companies (0.856), French companies (0.839)
and German companies (0.680). The current study has however indicated low compliance
levels for Ireland (which previously followed the UK GAAP) which suggests that while
UK companies had mostly complied with the IFRS guidelines, Ireland companies had
not. The low results however may be attributed to the manner in which inclusion criteria
in the computation of the Jaccard indices was carried out. The limitations found by
Morais and Fialho (2008) were again noted where some of the Ireland companies
disclosed information about subsequent measurements in notes but failed to give
information about the initial measurements. In such instances, the advice given by
Morais, and Fialho, (2008) and Rahman et al. (2002), was followed where the items were
considered as not represented and hence assigned a value of “0”. NP items have a
negative effect on the JAAC index as these cases are observations of mismatches, and the
higher the number of NPs, the lower the JACC index (Morais, & Fialho, 2008: Rahman
et al., 2000).
Analysis of the levels of compliance by the industry sector (see table 2 below)
indicated that financial companies had the highest mean values (0.6397), followed by the
investment and services industry, technology and telecommunication companies and
production, industrial and construction sectors (means of 0.4548, 0.4242 and 0.3766). As
noted earlier, the current study employed a broader categorization as opposed to earlier
studies that have employed two categories (financial and non-financial). By further re-
classifying companies in the non-financial sector into the other categories, the mean
values have indicated that discernible differences in compliance abides. Nonetheless, un-
tabulated results have indicated that the financial sector has revealed higher values
(0.6397) as compared a value of 0.2277 if the two broad categorizations had been
adopted. The findings are consistent with prior research findings. For example, in their
study, Morais and Fialho (2008) reported that the mean values for financial companies
based on their 5-EU countries analysis was 0.844 as compared to 0.802 for the non-
financial companies (std 0.150 and 0.138, respectively). This reinforces the widely held
believes that companies in the financial sector are more inclined to conform to
accounting and other imposed regulations (such as IFRS and IAS 39) due to the extended
levels of scrutiny by the concerned bodies.
Table 2: Jaccard indices per sector categorization
Sector N Minimum Maximum Median Mean Standard
deviation
Financial 6 0.4286 0.7391 0.6670 0.6397 0.1082

Production,
Industrial and 26 0.2143 0.7273 0.3600 0.3766 0.1817
construction
Investment and
15 0.1852 0.7143 0.3600 0.4548 0.2026
service industry
Technology and
7 0.1852 0.7273 0.4783 0.4242 0.2224
Telecommunications
Total 54 0.1852 0.7391 0.3600 0.4337 0.1991
The total number of companies that had been audited by the big four auditors
were found to be many (49) relative to the small auditors (5). These were distributed
as follows KPMG-20, Price water house coopers-13, Earnest and Young-8 and
delloite and touch-8 (see appendix 3). The other companies had been audited by LHM
Casey McGrath (3), Grant Thornton (n=1) and Horwath Bastow Charleton (n=1). The
mean commutations revealed that those companies that had been audited by the big 4
had higher values (mean=0.4532) as compared to the others audited by small auditors
(mean=0.2434). These results have been summarized in table 3 below. Again the
findings are consistent with prior studies investigating the influence of auditors on the
levels of compliance (see Morais & Fialho, 2008).
Table 3: Assessment by auditors
Std
Auditor N Minimum Maximum Median Mean
deviation
Audited by big
49 0.1852 0.7391 0.4286 0.4532 0.1982
four
Others 5 0.2143 0.3600 0.2143 0.2434 0.0652
Total (entire
54 0.1852 0.7391 0.3600 0.4337 0.1991
sample).
Finally, descriptive analysis were carried out to test whether bigger companies
would reveal higher means as compared to the smaller companies. Following the advice
given by Parsley & Halabisky (2008), the companies that were categorized as small were
the majority (35) as compared to big companies (19), which was a 65% representation.
The computation of the mean values revealed that big companies registered higher values
(mean=0.6361) relative to the smaller companies (mean =0.3239) (see table 4 below).
Again this is consistent with earlier studies indicating that companies that larger
corporations will more readily comply with guidelines as opposed to smaller
corporations, due to the larger visibility and hence the added impetus to protect their
reputations (Watts & Zimmerman 1978; Holthausen & Leftwhich 1983; Cooke 1989),
availability of more resources which enable them to comply with new accounting
standards (Al-Shammari et al. 2008) and finally, the lesser costs incurred in accumulating
detailed information (Singhvi & Desai 1971; Firth 1979). Conversely, smaller firms will
tend to conceal crucial information, given the prevalent competitive domains of their
operations (Morais & Fialho, 2008).
Table 4: JACC indices by size of the firm
Size of
Std
the N Minimum Maximum Median Mean
deviation
company
Big
19 0.4286 0.7391 0.6521 0.6361 0.0895
companies
Small
35 0.1852 0.7273 0.2258 0.3239 0.1492
companies
Total
(entire 54 0.1852 0.7391 0.3600 0.4337 0.1991
sample).
Statistical analysis
The statistical tests of significance were then computed in order to test whether
the observed differences in mean values were significant enough or could be attributed to
mere chance or sampling errors. The first test of significance conducted was aimed at
assessing whether the mean Jaccard values as indicated by the sectors were significant
enough. This analysis revealed that the means between the all the sectors were significant
enough at the .05 alpha levels (see table 5 below). Meaning that we cannot reject the
earlier hypotheses developed H1: the levels of compliance with IAS 39 will differ as an
attribute of sector categorization for the Ireland companies. These differences were
however not significant enough at the 0.01 levels of significance. Previous studies on the
choices of accounting methods have shown that the business sector to be a significant
factor (see McLeay and Jaafar 2007: Meek et al. 1995: Cooke, 1992), intimating a close
relationship between disclosure levels and industry sector (Cooke 1992: Raffournier
1995). It has also been noted that financial institutions will certainly be more regulated as
opposed to companies in other sectors. This will imply that financial institutions maybe
more obliged to conform to IASB standards as compared with non-financial companies.
In their study, Morais and Fialho (2008) had reported similar differences between the
means of the financial and non-financial companies by employing the Gaussian
distribution. This further supports the view that differences between financial and non-
financial companies abides in their levels of compliance. The current study further posits
that these differences exist between the non-financial sectors themselves.
Table 5: Differences in means of jaccard index by sector
Production,
Investment Technology and
Financial construction
and services telecommunication
and industry
Financial -1.5291 -2.1672 -9.8200
Production,
construction -3.6259 -1.6906
and industry
Investment and
-2.65026
services
tcritical = 1.27602 (two tail), α = 0.05,
The assessments of the whether the jaccard means as assessed by size (table 6)
again indicated that the mean differences were significant enough at the .05 alpha levels
and hence we could not reject the earlier hypothesized assumption that large sized
companies would exhibit greater compliance levels as opposed to smaller companies
(tcritical = 1.27602 (two tail), α = 0.05). These differences were however not found to be
significant enough at the 0.01 alpha levels. Three reasons have especially been advanced
as to why larger corporations will more readily comply with guidelines as opposed to
smaller corporations, that is, the larger visibility and hence the added impetus to protect
their reputations (Watts and Zimmerman 1978; Holthausen and Leftwhich 1983; Cooke
1989), availability of more resources which enable them to comply with new accounting
standards (Al-Shammari et al. 2008) and finally, the lesser costs incurred in accumulating
detailed information (Singhvi and Desai 1971; Firth 1979). Conversely, smaller firms
will tend to conceal crucial information, given the prevalent competitive domains of their
operations (Morais & Fialho, 2008). The current study findings are therefore consistent
with other research studies investigating the influences of size on the levels of
compliance. However, in their study, Morais and Fialho (2008) had reported significant
differences in size as a significant factor influencing the levels of compliance with IAS
39 guidelines for the companies in the 5 EU nations.
Table 6: Differences in means of jaccard index by size
Small companies
Big companies -3.2516
Analysis of whether auditors influenced the levels of significance however
indicated that this was not significance at the 0.05 and 0.01 alpha levels (table 7). These
meant that the findings generated could not allow for the acceptance of the hypotheses
H3: the level of compliance with IAS 39 will be higher in companies that have been
audited by the big four auditors will show higher compliance. As reported in the study,
majority of the companies had been audited by the big four auditing firms (49, or 91% of
the firms), which would provide explanations for the less variability indicated in this
variable. In their study, Morais and Fialho (2008) had also found auditors as a significant
factor influencing the levels of compliance with with IAS 39 guidelines for the
companies in the 5 EU nations under investigation.
Table 7: Differences in means of jaccard index by Auditor
Others
Big four -1.2172
Chapter 5: Conclusion
5.1. Motivation and summary of research
The last few years has witnessed financial accounting paradigms from historical
to fair value concepts in reporting as the need for harmonization of financial reporting
undergoes tremendous transformations. The requirements for listed companies in EU to
adopt IFRS guidelines essentially related to two levels of accounting harmonization, at
standard level and secondly at the accounting information level which has been referred
to as the actual accounting outcomes resulting from the application of the standards
(Cassino & Gassen, 2008). The implementation of the fair value concepts as detailed in
the IAS 39 guidelines however presented interesting times for majority of firms,
especially when it is considered that the prevailing accounting frameworks in continental
European nations meant a radical change of perspectives for preparers and users alike,
largely as a construct of the differing national GAAP. The centrality of debates
surrounding the adoption of the IAS 39 guidelines has largely anchored on the concepts
of fair value as new accounting referents. Issues of the relevance and reliability of ‘fair
values’ as financial instruments referents have been debated extensively in literature.
Another concern has been trying to delineate the actual levels of harmonization wherein
several methods of measurements have been advanced and tested. A lot of studies have
since investigated the impacts of these guidelines in later years in order to investigate
whether these guidelines are being practiced as envisaged.
Understanding how fair value concepts relates to financial instruments and indeed
how measurements of the levels of harmonization acted as motivation for the current
study. In the current study, an investigation of the levels of compliance with the complex
standard IAS 39, financial instruments: recognition and measurement (IASB 2005)
among companies listed in the Dublin stock Exchange, Ireland was carried out. The study
was characterized as measurement harmonization and aimed to provide answers to these
four research questions; What are the levels of compliance to IAS 39 for publicly listed
companies in 2005 in Dublin Stock exchange?, What are the variations in the levels of
compliance to IAS 39 standards between the different industry sectors, for the publicly
traded companies in the Dublin Stock Exchange?. The data was obtained from the
companies listed in the Dublin stock exchange and by employing the Jaccard index and
statistical tests of significance, the following hypotheses were tested:
1. The levels of compliance with IAS 39 will differ as an attribute of sector
categorization for the Ireland companies
2. The levels of compliance with IAS 39 will be more stringent (higher) in
larger as opposed to smaller companies for the companies listed in Ireland
stock exchange
3. The level of compliance with IAS 39 will be higher in companies that
have been audited by the big four auditors

The analysis presented in the paper has indicated that the overall Jaccard index was
0.4337. Analysis of the levels of compliance by the industry sector indicated that
financial companies had the highest mean values (0.6397), followed by the investment
and services industry, technology and telecommunication companies and production,
industrial and construction sectors (means of 0.4548, 0.4242 and 0.3766). Companies
audited by the big 4 had higher values (mean=0.4532) as compared to the others audited
by small auditors (mean=0.2434). Finally, big companies registered higher values
(mean=0.6361) relative to the smaller companies (mean =0.3239). The low results
however may be attributed to the manner in which inclusion criteria in the computation of
the Jaccard indices was carried out.
Table 8: summary of the hypotheses tests
Hypo Study hypotheses Result of the
thesis analysis
H1 The levels of compliance with IAS 39 will differ as an significant
attribute of sector categorization for the Ireland companies
H2 The levels of compliance with IAS 39 will be more stringent significant
(higher) in larger as opposed to smaller companies for the
companies listed in Ireland stock exchange.
H3 The level of compliance with IAS 39 will be higher in Not significant
companies that have been audited by the big four auditors

5.2: Limitations of the research and future research directions
The current study has suffered from several limitations. The generalisability of
our findings has for example been limited by the fact that that not all companies were
assessed, as some did not reveal their financial reports or such information could not be
found. Essentially, this reduces the statistical power of the tests which biases against
computing the overall index and the company specific factors, size and auditor, in
accounting information for the IFRS sub-sample. Thus, while this may have been
addressed by conducting a battery of tests using different aspects of the opaque
dependent variable “accounting practice” to increase the power of our statistical tests, the
small sample size limited generalisabiility of the entire compliance level in Ireland. In
addition, the tests applied relied on our models capturing economic reality in a complete
and unbiased manner. This is most probably not true in all cases (see Cascino and
Gassen, 2008). Conversely, to the extent that the models used omitted some important
independent variables, the results obtained in the study might be invalid or strong enough
for inference making.
The study has also indicated very low results for the Jaccard indices. These low
results may been attributed to the manner in which inclusion criteria in the computation
of the Jaccard indices was carried out. This has been attributed to the fact that a lot of
items were found missing and in such cases, the items were considered as not represented
and hence assigned a value of “0”(Morais, & Fialho, 2008: Rahman et al., 2000). This
again may reduce the accuracy of the results. Lastly, it should be understood that the
current study has relied on data obtained in the year 2005. Thus, even though the findings
generated may have portrayed the accounting compliance levels in 2005; new
modifications to the IAS 39 guidelines have since been effected. It has further been
suggested that the levels of compliance increases with the number of years following the
issuance of new accounting (or any other guidelines for that matter). The study may
therefore not accurately capture the current levels (in the year 2009) levels of accounting
compliance with IAS 39 guidelines in Ireland.
Given the above limitations, additional research using institutional expertise to
investigate the harmonizing effect of IFRS adoption in Ireland seems called for. It is
therefore advised that future studies replicate this study in order to ascertain whether the
results presented in this study are actually true by employing a bigger sample size and
different assessment criteria for the computation of the Jaccard indices (or other
measurement instruments for that matter). Indeed, the current study fails to capture the
current compliance levels (in 2009). It is therefore further recommended that future
studies employing more recent data be utilized in order to test the current harmonization
levels. This would also help benchmark whether there has been a rise (or fall) in
compliance levels since 2005.
5.3: significance of the research and study implications
The debates over harmonization and use of fair value models continue to elicit
mixed views in the accounting domains. As noted in the introductory section, it is
expected that the current study will add to the growing literature on the effects of IFRS
and IAS 39 adoption in Europe, as the synopsis delved on an analysis of the mandatory
adoption of these practices on the compatibility of accounting information. It is for
example hoped that although the study did not take a stand on the reigning debate on fair
value concepts, a better understanding of these and how they are conceptualized within
the contexts of IAS 39 standards has been developed. In this way, the degree of adoption
of fair value measurement as opposed to historical costs valuation method and the way
the two maybe relevant to the capital market participants concerned with the impacts of
IFRS adoption have been better conceptualized. Such information may for example be
useful to regulators, managers, investors and other stakeholders.
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Appendices
Appendix 1: Compliance checklist
Notation Items IAS 39 Companies

1 Financial assets at fair value through
profit or loss
1.1 Initial measurement 1 (1 or 0)
1.1.1 fair value plus transaction costs 0 (1or 0)
1.1.2 fair value
1.2 Subsequent measurement 0 (1or 0)
1.2.1 cost 0 (1 or 0)
1.2.2 amortized costs 1 (1or 0)
1.2.3 fair value in profits or loss 0 (1or 0)
1.2.4 fair value in equity 0 (1 or 0)
1.2.5 impairment
2. Held to maturity investments
2.1 initial measurement
2.1.1. fair value plus transaction 1 (1 or 0)
costs 0 (1 or 0)
2.1.2. fair value

2.2 subsequent measurement 0 (1 or 0)
2.2.1 cost 1 (1 or 0)
2.2.2. amortized costs 0 (1 or 0)
2.2.3 fair value in profits and losses 0 (1 or 0)
2.2.4. fair value in equity 1 (1 or 0)
2.2.5 impairment
3. Loans and receivables
3.1 initial measurements
3.1.1.1 fair value plus transaction 1 (1 or 0)
costs 0 (1 or 0)
3.1.2. fair value
3.2 subsequent measurements 0 (1 or 0)
3.2.1. cost 1 (1 or 0)
3.2.3. fair value in profits and losses 0 (1 or 0)
3.2.5. Impairment
4. Available for sale financial assets
4.1. initial measurements
costs 0 (1 or 0)
4.1.2. fair value
4. 2 subsequent measurements 1 (1 or 0)
4.2.1. cost 0 (1 or 0)
42.5. Impairment
5. 0 Financial liabilities at fair value through
profits and losses
5.1. initial measurements 1 (1 or 0)
costs
5.1.2. fair value 0 (1 or 0)
5. 2.1. cost 1 (1 or 0)
5 .2.2. amortized costs 0 (1 or 0)
5.2.4. fair value in equity
5.2.5. Impairment
6.0 Other financial liabilities
6.1. initial measurements

costs 0 (1 or 0)
6. 1.2. fair value
6. 2.1. cost 1 (1 or 0)
6 .2.2. amortized costs 0 (1 or 0)
6.2.5. Impairment
7. 0 Derivatives
7.1 fair value hedge
7.1.1. profit and loss 1 (1 or 0)
7.1.2 equity 0 (1 or 0)
7.1.3 Deferral 0 (1 or 0)
7.2 Cash flow hedge
7.2.2 equity 1 (1 or 0)
7.2..3 Deferral 0 (1 or 0)
7.3. Hedge of a net investment in a foreign
operation 0 (1 or 0)
7.3.2 equity 0 (1 or 0)
7.3..3 Deferral
7. 4. Financial assets or liabilities at fair
value through profits and loss 1 (1 or 0)
7.4. .2 equity 0 (1 or 0)
7.4..3 Deferral
Appendix 2: Jaccard indices for various industry Sectors
a) Financial
Company JACC INDEX
Allied Irish Bank Plc 0.652173913
Anglo Irish Bank Corp Plc 0.652173913
AVIVA plc 0.428571429
Bank of Ireland 0.681818182
FBD holdings 0.684210526
IL&P plc (Irish Life & Permanent) 0.739130435
Total 3.838078398
N 6
Min 0.428571429
Max 0.739130435
Mean 0.639679733
Median 0.666996047
STDEV 0.108192428
b) Production, Industrial and construction

Aminex plc 0.523809524
CRH Plc 0.65
Dragon Oil plc 0.473684211
Elan Corporation 0.5625
Glanibia Plc 0.538461538
GreenCore Grp plc 0.727272727
IAWS GRP 0.727272727
Kenmare Resources plc 0.225806452
Kerry Grp Plc 0.36
Kingspan Grp Plc 0.36
McInerney Holdings Plc 0.333333333
Ready mix plc 0.36
Real estate opportunities Ltd. 0.36
Trinity Biotech Plc 0.36
Icon PLC 0.727272727
Tullow Oil Plc 0.36
United Drug 0.214285714
Viridian Group Plc 0.214285714
Abbey PLC 0.214285714
Donegal creameries plc. 0.214285714
Glencar mining plc 0.214285714
Lapp Plats plc 0.214285714
Minmet plc 0.214285714
Ormonde Mining plc 0.214285714
Ovoca Gold Plc 0.214285714
Providence Resources Plc 0.214285714
Total 9.792270382
N 26
Min 0.214285714
Max 0.727272727
Mean 0.376625784
Median 0.36
STDEV 0.181685323
c) Investment and service industry

C&C Group plc 0.681818182
DCC PLC 0.65
Fyffes Plc 0.636363636
Diageo Plc 0.65
Grafton Group Plc 0.714285714
IFG Grp Plc 0.7
IRISH CONTIN. GRP 0.185185185

Paddy Power Plc 0.36
Ryanair Holdings Plc 0.36
Tesco Plc 0.36
Ulster Television Plc (UTV) 0.36
CPL Resources Plc 0.214285714
Irish Estates Plc 0.214285714
Newcourt Group Plc 0.214285714
Thirdforce Plc 0.52173913
Total 6.822248991
N 15
Min 0.185185185
Max 0.714285714
Mean 0.454816599
Median 0.36
d)Technology and telecommunications

DATALEX 0.65
Eircom Group plc 0.47826087
HORIZON Technologies Group 0.727272727
Independent. News & Media plc 0.5
Iona Technologies plc 0.185185185
Vislink Plc 0.214285714
Getmobile Europe plc 0.214285714
Total 2.969290211
N 7
Min 0.185185185
Max 0.727272727
Mean 0.424184316
Median 0.47826087
STDEV 0.222397179
Appendix 2: Categorization by auditors
Std
Auditor N Minimum Maximum Median Mean
deviation
Big four audit firms 49 0.1852 0.7391 0.4286 0.4532 0.1982
 KPMG (n=20)
 PriceWater
Coopers
(n=13)
 Ernest
&Young LLP
(n=8)
 Delloite &
Touche (n=8)
Others
 LHM Casey
McGrath
(n=3)
 Grant
Thornton 5 0.2143 0.3600 0.2143 0.2434 0.0652
(n=1)
 Horwath
Bastow
Charleton
(n=1)
Total (entire
54 0.1852 0.7391 0.3600 0.4337 0.1991
sample).

Harmonized Accountings

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Harmonized Accountings

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Harmonized accounting 1

Do Harmonized Accounting Standards Lead to Harmonized Accounting Practices?

An Empirical Study of IAS 39 Measurement Requirements in Ireland

In Partial Fulfillment of the Requirement for a master of ------------------

Table 1: Industry sector categorization---------------------------------------------------------62

Table 2:Jaccard indices by sector categorization ---------------------------------------------67

Table 3: assessment by auditors -----------------------------------------------------------------67

Table 4: Jacccard indices by size of firm -------------------------------------------------------68

Table 5: Differences in means of Jaccard index by sector------------------------------------69

Table 6: Differences in means of Jaccard index by size---------------------------------------70

Table 7: Differences in means of Jaccard index by auditor-----------------------------------70

Table 8: Summary of hypotheses results --------------------------------------------------------74

Figure 1: A 2*2 table for jaccard indices computations -----------------------------------63

financial instruments: recognition and measurement (IASB 2005) among companies

and services industry, technology and telecommunication companies and production,

(mean=0.4532) as compared to the others audited by small auditors (mean=0.2434).

harmonization and compliance with IFRS/IAS39 have also been presented.

Chapter 1: Introduction and problem statement

undergoes tremendous transformations. The determinants role in the evolution of

referents as a direct consequence of globalization and economic integration processes. It

important milestone within the frameworks of accounting practices in the history of

participants in these capital markets by increasing the compatibility of financial

and Gassen, 2009).

diversity in the individual countries accounting standards (Armstrong, et.al, 2008).

with a large number of financial instruments such as banks (Armstrong, Barth,

Jagolinzer, & Riedl, 2008).

Regarding the above requirements, two major guidelines were deemed

firms to designate the financial instruments irrevocably on initial recognition as ones to

(Armstrong, et.al, 2008). Conversely, hedge accounting reduces volatility in profits or

1.2. Organization of the thesis

The first chapter will present a background to the international harmonization

investigation in the fields of harmonized accounting standards is presented. Essentially,

the accounting harmonization and compliance is disseminated. The methodology chapter

conclusions and recommendations.

1.3. Background to the IAS 39 and fair value accounting

1.3.1. Specific objectives of IAS 39

The requirements for listed companies in EU to adopt IFRS guidelines were

European nations by mandating a single set of accounting standards referents (Regulation

Gassen, 2008). This would lead to enhanced harmonization, compatibility and

convergence in the accounting arena. A definition of accounting harmonization at the

viewed as a strategy or an action but rather an effect (de factor, or material

harmonization) (Van der Tas, 1992).

It has been noted by several authors that harmonization in accounting practices

In theory, harmonized accounting practices would equate to homogeneous accounting of

homogenous economic activities across firms while heterogeneous activities would

in cross-country homogeneity would be the case (Cassino & Gassen, 2008).

1.3.2 The fair value model

The use of fair value referents represents a financial reporting paradigm

conceptualized in fair valuation of financial instruments, away from historical concepts.

instruments) represents a series of detailed assessment criterions guiding recognition and

instrument by adopting a valuation technique that essentially incorporates the overriding

prices of such financial instruments. Third, an institution should be excluded from

firms, especially when it is considered that the prevailing accounting frameworks in

been supported in both academic and empirical literature.

1.4. Motivation for studying IAS

the amplification for compatible accounting referents as a direct consequence of

is financial and capital profitableness improvements, the existence of groups or holdings

growing numbers in multinational and transnational companies, answering the needs of

multinational companies to external sources of financing (Mustata & Dumitru, 2006).

in the representation of financial instruments are referents.

A major bottleneck that is facing international accounting standardization efforts

comparability and compatibility degrees between the existent accounting settlements at