International Research Journal of Finance and Economics ISSN 1450-2887 Issue 61 (2011) EuroJournals Publishing, Inc. 2011 http://www.eurojournals.com/finance.

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International Accounting Standards in Europe: A Comparative Study

Maria Do Cu Alves NECE - University of Beira Interior, Covilh, Portugal E-mail: mceu@ubi.pt Tel.+351275319600; Fax.+351275319601 Eduardo Antunes University of Beira Interior, Covilh, Portugal E-mail: eduardocameira@tlen.pl Abstract In this study we investigate the current state of financial accounting standardization in two European Union (EU) member states: Poland and Portugal. The marked globalization combined with the free borders within the EU and the accounting systems diversity has strengthened the need for a unique accounting system that is internationally accepted and that will simplify smooth the progress of accessing foreign capital markets. To study the European Accounting Harmonization, an analysis on how this process developed in two such different countries as Portugal and Poland will be made. In order to achieve this purpose a descriptive approach was chosen based on secondary data available in Polish and Portuguese official documents, books and scientific articles. The results show a vital significance and contribute of the accounting harmonization process for the development of the global economy. However, the process is not yet concluded, that it must still develop itself and gain a bigger flexibility that will allow it to better adapt to each countries specifications. Concerning Portugal and Poland the cultural and social differences resultant from very different historic and politic backgrounds overcome the differences relating their accounting systems.

Keywords: Financial Accounting Standards, International Accounting harmonization, International accounting research, Poland, Portugal. JEL Classification Codes: M41; M48; N40.

1. Introduction
The research on International Accounting Harmonization (IAH) has been gaining great importance in recent years due to the globalization of markets and the consequent internationalization of business (Van der Tas, 1992, Van Hulle, 1993; Hopwood, 1994, Fritz and Lamme, 2003; Barbu, 2004, Nobes and Parker, 2006, Baker and Barbu, 2007). This increased globalization of markets, the complexity of commercial trading of companies and the concentration of business in global competition has led to a greater need to raise funds with diversified investors. This reality has imposed a deep discussion about the need for international harmonization. According to Emenyonu and Gray (1992), IAH has continued to generate interest among accounting practitioners, academics, investors and other users of

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corporate financial reports. A variety of organizations, including the International Accounting Standards Committee (IASC), the United Nations Centre on Transnational Corporations (UN), the Organisation for Economic Co-operation and Development (OECD), and the European Community (EC) have committed substantial resources in order to promote international understanding on accounting issues and to pursue the goal of international accounting harmonization. However, in spite of all these endeavours, little has been done to devise a way of quantitatively determining the extent to which such efforts have been successful(pp. 49). Consequently in literature on the subject of European financial reporting we frequently find expressions of doubts concerning the level of harmony of financial reporting in the European Community (Van der Tas, 1992:69). The greater comparability of accounting information is the ultimate goal of the process of harmonization. It is an attractive aim but a very difficult one to achieve (Emenyonu and Gray, 1996). The literature review allowed us to conclude that the process of IAH has begun in the 60s. Within this scope, the steps taken by the European Union and the pressures exerted by Multinational Corporations in the process are recalled. In this context, the main objective of this study is to examine the entire process of IAH, focusing the research in two Member States: Portugal and Poland. Portugal as a country included in the Continental European Accounting Model and Poland as an example of a transition economy. The article proceeds as follows. After pointing out the relevance and timeliness of the theme and the objectives of the study, it is given prominence to the process of accounting harmonization in the European Union showing its role in the historical evolution of Portuguese and Polish accounting standards. It is then carried out a comparative analysis highlighting the main differences found in the normative of these two countries when compared with the international accounting standards (IFRS). Attention is drawn to the final conclusions of the work.

2. Accounting Harmonization in the European Union

To address the problem of differing accounting systems in the global market the IASC (International Accounting Standards Committee) was created in 1973. The IASC led in 2001 to the IASB (International Accounting Standards Board), whose function is to create and promote a body of accounting standards based on the identification of best accounting practices in a global level. With the IASB a new system of accounting standard without borders that opened the doors of international markets to all companies wishing to operate there has been developed. The main tool of this new system took the name of IFRS (International Financial Reporting Standards). Increased globalization and the demands of the capital markets for relevant and comparable information internationally have culminate in the EU regulation (EC) 1606/2002 which requires application of IFRS by companies listed on the European stock markets. The process of accounting harmonization is far from being a consensus process. The revision of literature shows favourable and adverse arguments (Burlaud, 2001, Ali, 2005). The most frequent criticism lies in the fact that the accounting system must be adapt to the economic and social context in which the company is incorporated (Hopwood, 1994, Cairns, 1997; Lehman, 2005). However, although many critics, it appears that as the process of globalization of financial markets progresses; the voices in favor seem to prevail (Van Hulle, 1993; Thorell and Whittington, 1994, Cairns, 1997, Nobes and Parker, 2006). But, in this process, the difficulties of implementation cannot be forgotten. The literature review carried out shows that there are challenges in the implementation of IFRS by European companies (Alp and Ustundag, 2007). Such challenges have occurred not only during the period of adaptation of national legislation to EU directives but also during the implementation of this legislation (Wong, 2004; Alp and Ustundag, 2007). With the development of global markets, accounting harmonization can no longer be restricted to European territory and the needs, not only of the member States but also from all countries that have economic relations with the EU, must be considered. In this context the issue of standards by international organizations such as the IASB overlaps with European Directives that are focused "only"

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in Europe. According to the legislative tradition and with the European directives, accounting in the EU is still a theme associated with the legal and tax systems. But that should change since the future of the harmonization process is related to the response to the demands of capital markets, which demand a new approach of financial reporting by the EU. Unlike the established by the European directives, the process of harmonization should not be geared towards a single legal form of business, but for all companies wishing to trade in financial markets (Emenyonu and Gray, 1992, Van der Tas, 1992, Nobes, 1993, Van Hulle, 1993; Thorell and Whittington, 1994; Joos and Lang, 1994; Carlson, 1997; Haller and Kepler, 2002, Baker and Barbu, 2007). Three stages can be identified in the process of accounting harmonization in Europe (Giner and Mora, 2001). A first stage of research, that has shown the accounting practice and regulations of the countries, helped the formal harmonization process and allowed to explain the diversity of standards and companies practices. The globalization of the economy marked the beginning of the second stage. Companies are beginning to take an active role in the harmonization process by putting pressure on institutions so that the new accounting rules allow a greater comparability of accounting and financial reporting required by global markets. In this stage the Multinational Corporations, whose accounting systems were very influenced by the need to resort to capital markets beyond borders, stood out. Finally, the adoption of the single currency marked the third stage which was also associated with the creation of the European Stock Exchange - Euronext. The EU is currently the most significant harmonizing force of major economies. Harmonization is achieved through the implementation of directives and regulations imposed by the EU. Since 2005 the accounting practices of listed companies have been subject to externals controls known as financial reporting enforcement. In the EU, the purpose of enforcement of standards on financial information is to protect investors and promote market confidence (CESR, 2003).

3. Polish National Standard and IFRS

In the last decade the financial reporting in Central and Eastern Europe (CEE) changed as a result of important economic and political changes, and the transition from centrally planned economies to market economies has created the need for new accounting practices. Historically, it is important to remember that in 1945, after 6 years of Nazi occupation, the Poles discovered that the so-called "liberation" meant, after all, replacing the domain of the Nazi regime by the Soviet regime. The recall of these events allows us to consider the more significant economic and accounting developments. In fact we are talking about a country that became independent, capitalist and democratic less than 20 years ago and yet has already become a member of the European Union and that, since 2005, seeks, with some success, to implement IFRS. Next, we aim to highlight the main steps in this transition. In Poland the purpose of the new Act on Accounting, which was enacted by Parliament on September 1994, was to introduce full compliance of existing standards with EU regulation including Directive 4 and 7, Directive 86/635 and Directive 91/674. The Accounting Act 1994 incorporated into the Polish accounting law mainly the European Union Directives but also issues from the Conceptual Framework of the International Accounting Standards Board (IASB) (UNCTAD, 2008:4). The general preamble to the Act states that new accounting standards should also comply with international standards if they did not contradict the EU directives and if their application was possible in the actual stage of Polands economic development (Jermakowicz and Rinke,1996:76). Much greater convergence of Polish accounting to IFRS was achieved through the introduction of the Accountancy Act 2000 which became effective from 1 January 2002 (Vellam, 2004:151). The act introduces regulations of areas that were omitted in the 1994 Act: for example Business Combination (IAS 22), Financial Instruments (IAS 32 and 39) and Leases (IAS 17). But, also, the new Accounting Act appeals to fundamental definitions, methods of valuation of assets and liabilities, and qualitative characteristics of accounting information (UNCTAD, 2008:5). Later, the Polands accession to the EU in 2004 triggered the need to full

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implementation of IFRS for all EU listed companies from 1 January 2005. So, Poland will be required to adopt a whole range of existing EU legislation and, at the same time, the IFRS adopted by the EU. Having been considered by the report of the OECD in 2000 as one of the most prosperous transition economies, Poland is a good example to study the accounting transition incurred in Central and Eastern Europe, a transition that result from the implementation of a market economy in place of the previous centralized economy, its EU accession and, obviously the implementation of IFRS. There are still many differences and problems associated with the implementation of IFRS. These differences are centered on some issues not covered in the Polish Accounting Regulation (PAR) (Krzywda and Schroeder, 2007), for example, the accounting for employee benefits, or the adjustments in the context of business activities concentration. Other differences stand out in the intangible assets that are calculated based on the book value, or investments in foreign currency are translated into the national currency in view of the lower conversion rate between the last rate conversion of the month and the average monthly rate allowing the deferment of gains. And finally, the PAR is based on rules rather than principles which cause incompatibility with IFRS. It should also be noted that accountants and auditors arrived at their current jobs and positions within companies in different ways, some by its own right and personal choice, others by inheritance of the system. So if some are great professionals, having no problem in understanding new or revised regulations and implement them, others have a questionable competence and they still have troubles in applying the Accountancy Act 1994 and the Accountancy Act revisions of 2000, and, of course, the IFRS. A major problem in the countries of Central and Eastern Europe results from their lack of experience in financial reporting oriented to the investor, characteristic of the transition economies that, in the last decade, have undergone major social, political and economic changes. Due to the involvement of investors / owners in the private capital firms (unlisted) there is a knowledge of the real value of the company and its profitability, which is not the case for publicly traded companies (listed companies) and thus the non-listed companies in market do not have such great a need to implement IFRS as listed companies do, where capital ownership and management of the company are in different hands.

4. Portuguese National Standard and IFRS

The Portuguese accounting system is characterized by Nobes (1981) as a system belonging to the "continental block" for its strong legislative" tradition, the strong link between accounting and taxation, the limited influence of the accounting professionals, because firms significantly recourse to bank financing and, finally, by the fact that the state is the primary recipient of the financial statements. Several studies have provided evidence that IFRS are applied inconsistently across countries and cultures, especially if countries have accounting environments which are different to that where IFRS were developed. However several steps have been taken in Portugal to promote the adoption of IFRS. As a result of European integration (1986), Portugals commercial and accounting policies are increasingly determined by EU legislation. Until 2005 all Portuguese companies prepared their financial statements in accordance with the Portuguese standards issued in 1991 following EU directives (Fourth and Seventh Council Directives). From 1991 it was decided to issue accounting guidelines showing a clear approach to the IASB standards, thereby allowing the accounting developments in Portugal to be perfectly fit into the strategy of the EU accounting harmonization. The convergence of Portugal with IFRS started in 1991, when Portuguese Accounting Standards Board (CNC) began issuing accounting standards (DCs) very similar to international accounting standards. When Portugal could not receive any support from EU to regulate new accounting issues, international accounting standards were adapted by Portugal using DCs (Fontes et al., 2005). After 2005, a dual regime of accounting standards has prevailed: one for listed companies and the other for non listed companies. Since 1 January 2010 a new Accounting System (SNC) based on endorsed IAS/IFRS is being implemented for non listed companies.

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The process of globalization requires an improvement in the efficiency of financial markets; this efficiency is achieved in Portugal and the EU, through the process of accounting harmonization. One result of this process is the gradual rejection of the method of historical cost over the fair value method. Although the method of historical cost is consistent with a greater reliability, it lacks the relevance that can only be offered by the method of fair value. The fair value is associated with the recognition of intangible assets (goodwill) which represent a factor that generates value for the company. Hence we can say that the Portuguese accounting system has a hybrid nature, with some operations valued using fair value, while others still to be valued by the historical cost method. The implementation of IAS / IFRS in Portugal has become urgent with the current financial crisis that has left investors skeptical about the veracity of financial information and with serious reservations at the time to invest their money in the stock market. The significance and potential of IFRS role was only brought into the light after a period of extreme instability (Bhimani, 2008:452). To facilitate the recovery of investor confidence it is imperative to clarify the overall performance of Portuguese listed firms, this being obviously the quality of its accounting and financial reporting. Financial reporting information, if transparent and technically standardisable, is seen as a mean of allaying the risks and making uncertainties more transparent within the intensifying global context of interconnectedness of economic entities and activities (Bhimani, 2008:452). In this perspective, the emerging role of IFRS is to mitigate risk. Nevertheless, as alleged by Haller and Keppler (2002), IFRS can only achieve its objective of ensuring the reliability and comparability of accounting information, if correctly applied and interpreted by those planning and preparing the financial statements. In this context, the "enforcement" of IFRS becomes relevant. Enforcement is a system to whenever possible prevent, and thereafter identify and correct, material errors or omissions in the application of IFRS in financial information and other regulatory statements issued to the public. (FEE, 2002:31). That is the "enforcement" can be seen as a system of control and is reflected in the implementation of mechanisms for proper implementation of IFRS. These mechanisms can be seen in a pro-active or reactive. A proactive approach assumes that the oversight body operates, in its own initiative, a systematic review of financial statements published by companies. While the reactive approach, assumes that only cases for which there are claims should be analyzed (FEE, 2002).

5. A Comparative Study
The purpose of this paper is to analyze the current state of financial accounting standardization in two EU member states: Poland and Portugal. Thats why the main differences between international (IAS/IFRS), Portuguese and Polish standards are analyzed. A comparative approach is used and data were collected from multiple sources including a survey of academic literature (Vellam, 2004; Deloitte, 2007, 2008) and publicly available documents such as press release. Fritz and Lamme (2003) suggest that the use of secondary data is suitable for this type of research. A comparative analysis will be used as methodology, and a descriptive analysis of the differences is made. Baker and Barbu (2007) argue that most work in this area has had a descriptive nature and good deals of research on IAH are comparative studies. To perform this comparative analysis we used a hermeneutic approach, since it is the one closest to the objectives (Fritz and Lamme, 2003). Through the hermeneutics analysis of the existing regulations in Portugal and Poland we aim to show how two nations with completely different history on accounting, economic, political, social and cultural domains react to the phenomenon of international accounting harmonization and how they have implemented IFRS in their systems. In this study, the Portuguese legal framework will be identified as PAS (Portuguese Accounting Standards) and the Polish as PAR (Polish Accounting Regulation). In a comparative analysis of PAS / PAR / IFRS the following situations were detected:

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Regarding the objectives of financial information there are no significant differences. In 2001 the Contact Committee of the European Commission had concluded that IAS 1 was compatible with EU legislation (EC, 2001). Regarding the characteristics of the financial information it appears that the PAR is very silent on this matter. The criteria for recovery of the financial statements are dependent on the accounting principles detailed in their normative. In general the PAR and PAS give more emphasis to the principle of prudence than IFRS. In the financial statements it is seen that the PAS is closer to IFRS than PAR, which has a smaller number of financial statements. IAS 1 and PAS are similar with regard to the considerations that should be taken when preparing the financial statements. Regarding The types of inventories PAR is clearly closer to IFRS than PAR. As for tangible assets, one of the main reasons for the discrepancies between the PAR and IFRS is that the PAR does not allow regular revaluations of tangible assets (Krzywda and Schroeder, 2007). In Portugal the revaluation of fixed assets is included in the "DC 16 - Revaluation of tangible fixed assets", this issue is part of IAS 16. The emphasis on conservatism in Portuguese and Polish Accounting Systems gives rise to differences in the treatment of intangibles assets by IFRS. In the Portuguese case the situation will be resolved in 2010 with the new accounting system (SNC). In Assets and Liabilities and in Mergers differences in procedures adopted by the PAR, PAS and IFRS are identified. In the Financial Instruments PAR is closer to IFRS than PAS. This follows the principle of historical cost, as IAS 39 elects the fair value as a model for measurement of financial instruments. Moreover, changes in fair value of certain assets and liabilities are driven to results of the period or equity capital, depending on the circumstances. PAS, since it follows the model of historical cost, only provides for the recognition of losses when compared to the market, being these losses recorded in the periods result. In relation to the treatment of Financial Instruments the Polish position has already diverge from the IAS due to the revision of IAS 39 that took place subsequent to the completion of the Polish Accountancy Act of 2000 (Vellam, 2004:151). A study (Deloitte, 2008) on the status of implementation of IFRS in the EU has been recently published. For Portugal and Poland, some results were obtained that indicate that the differences between the two countries are minimal. However the literature identifies some significant differences with regard to the voluntary adoption of IFRS by companies in the private sector. Portugal clearly takes the lead in this situation (Francis et al., 2008). This is not surprising since Poland is seen as a country in transition where there are still some differences from the EU normative (Craner et al., 2000). Also in 2007 the ICAEW (Institute of Chartered Accountants in England and Wales) prepared for the EU a comparative study on the implementation of IFRS and the application of fair value (Deloitte, 2007). In this work it appears that Poland requires its financial institutions to apply the fair value as well as all companies which are not subsidiaries of a company that already implements IFRS or that are waiting to be listed on stock exchanges. In Portugal the fair value is allowed to non-listed companies to consolidate their financial statements. However, some difficulties in the implementation of IFRS are identified. In Poland, we highlight the problems with the implementation of IFRS 2, IAS 18, 27, 28, 31, 32 and 36 (Jaruga et al., 2007). In Portugal the effort of the Commission of Accounting Standards is visible in the large number of accounting decrees issued resulting in a clear approach to IFRS. However they exhibit some faults. Thus, we highlight the lack of accounting standards for financial instruments, particularly for derivatives (Lopes and Rodrigues, 2007).

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6. Concluding Remarks
The globalization of markets combined with the open borders within the EU and the diversity of accounting systems has highlighted the need to create a unique accounting system that would be accepted internationally and which would facilitate access to international capital markets. This system was subsequently implemented by European Union countries and has taken the name of accounting harmonization. While this process has been initiated by bodies such as the IASB and the U.S., many authors (Caibano and Mora, 2004) consider that the greatest impetus was given by Multinational Corporations. With the globalization of markets the existence of multinational corporations listed on stock exchanges in several countries has increased and with them the need to standardize accounting and financial reporting. IFRS have to fill this need because his objective is the creation of true, comparable and transparent accounting and financial information, so that the financial statements assist in the increase trade across borders. Twenty years ago, Poland moved from a centrally planned economy to a market economy. It began by reinstalling the commercial, pre-communist code of 1936 and shortly afterwards issued a decree on accounting. This Decree established the basic concepts and principles of financial reporting in the newly established market economy. Since that time in 1989 until today the Polish political system has been continuously evolving and has been subject to multiple changes, corrections and updates. In 1994 a new accounting law was implemented which was later regularly updated. These changes were based on the IFRSs and introduced in Polish accounting legislation. Consequently the requirements of Polish reporting and financial consolidation were very close to those required by IFRS. Since Poland has changed its accounting legislation during the last 14 years using IFRS as a guideline, the differences between IFRS and PAR are not very extensive, the main differences lying in the notes of financial statements, where IFRS require more detail. Another difference lies in the emphasis placed by the IFRS of fair value, ie the valuation of assets and liabilities disclosed in the balance sheet according to their market value. The aim is to report the fair value of the company to shareholders. In PAR the historical value is used rather than the fair value. Here the emphasis is on the calculation of earnings per share and the calculation of earnings to shareholders. The Portuguese accounting system also underwent important changes in recent years. These changes represent significant steps towards international accounting harmonization (Fontes et al., 2005).There is however still a long way to go, particularly regarding the correct application of IFRS to Portuguese accounting practice. Social, cultural and political factors will not allow a single best model to the implementation of IFRS. Each country is a different case and each country must find the best way to introduce and adapt IFRS to their reality. For Portugal and Poland the cultural and social differences arising from different histories completely override the accounting differences. The fact that both countries are converging to IFRS leads their accounting systems to approach each other and the differences to be not that significant. The results of this study indicate the vital importance of accounting harmonization for the development of global economy, but also show that the harmonization process is not yet finalized and must gain greater flexibility to allow for a better adaptation to the specificities of each country. There were several limitations and difficulties encountered during this research. The few studies available at the Community level are limited to a very superficial statistical analysis or the study of a very narrow issue, not allowing to compare the results or discuss some of the conclusions reached in this work. Finally, we must not forget that the implementation of IFRS only became mandatory for certain companies, from 2005. Consequently, the limitation of the research and conclusions presented in this study are caused by the short time of practical implementation of the new standards. Further research is needed covering more countries. Last, Polish and Portuguese companies that successfully overcome the practical implementation challenges of IAS/IFRS are most likely to reap the benefits of adopting globally recognized financial reporting standards. The transition is expected to have a positive impact on their competitiveness and their integration into capital market (UNCTAD, 2008).

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We conclude this work by suggesting some ideas for future research. First, some studies point to a greater use of IFRS in larger companies with a high degree of internationalization (Dumontier and Rafournier, 1998). Other (Burlaud, 2001) highlight difficulties in the implementation of IFRS on SMEs, even considering that this phenomenon of accounting harmonization merely promote the large multinational groups. In this context, it becomes relevant to study the impact of accounting harmonization in Portuguese and / or Polish SMEs (Joshi and Ramadhan, 2002) trying to highlight the major difficulties and / or advantages of the process. On the other hand, investments in training and in information technology have been hailed as one of the biggest challenges for companies in the implementation of IFRS (Sellhorn and Gornik-Tomaszewski, 2006). In this context it would be interesting to conduct a survey of the situation and ascertain what the real difficulties of enterprises are. Research supported by NECE (Unidade de I&D financiada pelo Programa de Financiamento Plurianual das Unidades de

Acknowledgement
Research supported by NECE (Unidade de I&D financiada pelo Programa de Financiamento Plurianual das Unidades de I&D da FCT - Fundao para a Cincia e Tecnologia, do Ministrio da Cincia, Tecnologia e Ensino Superior).

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