Analysis of the initial impact of the IAS 38 in Italy: a survey of the TechStar companies

LONG ABSTRACT § INTRODUCTION (CONCEPTUAL CONTEXT) § Introduction of the IAS/IFRS entails important changes for Italian companies, characterised by civil law accounting culture, including assessment and accounting of intangible assets which is one of the most fundamental issues. Our attention focuses on companies listed in the Italian TechStar sector consisting of firms where high growth potential derives from a strong drive towards innovation or high-tech products/processes and in which the intangible assets are some of the most critical elements of company management, hence they have a significant impact on financial performances. These companies are also among the smallest quoted in Italy, hence it will be interesting to verify the level of implementation of the IAS/IFRS. PURPOSE § After a brief comparison between IAS 38 and Italian law, the aim of this paper is to study the effects of IAS 38 application on financial disclosure and on financial performances via an empirical analysis. Our attention focuses on analysis of the interim reports of 30th June 2004 and 2005 and on the annual reports of 31st December 2004, which were presented both according to the Italian GAAP and the IAS/IFRS. This analysis will permit the quantification of the quantitative impact and the construction of a “disclosure index” to identify some communication models used by the companies in this important phase of IFRS adoption. Financial statements and interim reports concerning FTA and the first IFRS-compliant accounting document will be analysed. Investors are very sensitive to the financial communication of the TechStar companies, as many of them show non-positive economic trends in the short term: the study therefore aims to assess the impact of the IAS 38 on financial reporting values and on communication processes. DESIGN AND METHODOLOGY § Three closely linked phases (or points): 1. analysis of the quantitative impact; 2. analysis of the documentation available; 3. construction of the disclosure index. With reference to point 1) the investigation was carried out on the periods 2003 and 2004 (FTA or transition date) and indexes of variation and incidence were constructed. With reference to point 2), the documents were analysed by disclosure-scoring analysis (or partial form of content analysis), which was applied exclusively to the parts of the documentation containing the information required. With regard to information concerning first-time adoption, with specific reference to the IAS 38, 48 variables were used, relative to the following areas of investigation or categories: specific information; adjustments; goodwill; disclosure about quantitative impact on equity, net income, cash flow statement. As regards information concerning the first IAS-compliant document, 60 variables which entail intangible assets were used, relative to the following categories: a) recognition and measurement; b) measurement after recognition; c) useful life; d) retirements. In relation to point 3), the objective is to construct an indicator that permits summarising of the level of disclosure relative to the intangible assets, as deriving from the document relative to the first application (transition document) and from the first IAS-compliant document. For this purpose, an important methodological aspect is correct identification of the actual level of disclosure measured, taking account of the information complexity of the company: in other words, the presence/absence of a variable is assessed only if a specific information requirement exists. All the variables identified have been split into three types: - the introductory variables, which are not assigned a score, since although they are useful for defining the context of company disclosure, they cannot be directly connected to it; - the autonomous variables which, due to their general importance, should always be disclosed in the financial statement and in the interim reports; - the subordinate variables, which are taken into account only when the information requirement is present within the firm. This method therefore provides a disclosure indicator that could be defined relative, between 0 and 1 (or, better, between 0% and 100%), obtained from the ratio between the score found for the individual company and the actual situations in which disclosure is necessary. FINDINGS § To sum up and in the light of the results concerning the disclosure index, the overall situation does not require any further comment: the Ias/Ifrs cannot affect, at least in the short term, the communication choices of the companies, which depend on the strategies pursued in relations with the stakeholders, i.e. on the financial traditions and transparency existing in each individual situation. It will be very important to monitor if there are changes in the future induced by a greater awareness of the requirements of the international accounting standards. Similarly, from examination of the transition documents it was observed that in some cases the goodwill underwent significant modifications in terms of both value and composition. However the information made available did not appear to be adequate. There is also little information (as already seen in the FTA analysis) in relation to the distinction between intangible asset with finite useful life and indefinite useful life: in our opinion this is a negative situation for several reasons. In more general terms, our judgement on the level of disclosure emerging from the analysis performed is not positive. Given the scope of the changes introduced by the IAS/IFRS and the importance of intangible assets for the TechStar companies, we expected more information, also of the voluntary type, in order to communicate to the outside the particular characteristics of the new accounting standards, whereas the attitude that emerged on the part of the companies investigated is conservative, as if the IAS/IFRS had always been applied or as if they were of little importance. Furthermore, not only is there little voluntary information but at times there is also little mandatory information concerning the most delicate aspects introduced by the IAS 38. ORIGINALITY/VALUE § This topic is interesting because the harmonisation process, which is only limited to the listed companies at the moment, will involve many companies in the near future. For this reason it is important to study the effects produced by the IAS 38 which is one of the most relevant international accounting standards. In more detail, on this topic, we chose Italian companies because of the remarkable differences between local and international accounting standards. PAPER TYPE § Research paper