The Effect of the German Accounting Law Modernization Act on the Comparability of Private Local GAAP and IFRS Firms

Abstract

One of the Accounting Law Modernization Act's aims was to provide a long-lasting, lower-cost, easier, and full-fledged alternative to IFRS for private firms. While the comparability of accounting rules (i. e., the de jure comparability) between German GAAP (HGB) and IFRS increased as a result of this reform, related research indicates that reporting incentives play an important role in shaping reporting practices (i. e., de facto comparability). With heterogeneous incentives being present, it remains questionable whether de facto comparability between HGB and IFRS firms followed the increase in de jure comparability. Using consolidated accounts of private firms voluntarily reporting under IFRS together with variations of matched HGB reports and output-based comparability measures in a pre-post design including firm years from 2003 to 2011, I find that the de facto comparability between private HGB and IFRS firms increases (decreases) from the pre-to the post-BilMoG period for matched firm pairs belonging to similar (dissimilar) industries.

Output-based measurement of accounting comparability: A survey of empirical proxies

“…The findings, which show that comparability substantially increases after the reform, are consistent with the view that even a modest alignment of two accounting systems can foster more comparable financial reporting choices. However, since the results of Gross (2016) seem to depict a specific equilibrium for firms under various incentives, it remains questionable whether and to which extent his results are generalizable.…”

“…Brochet et al (2013) find evidence consistent with the notion that, after IFRS adoption, insiders' ability to profit from private information decreases through the channel of increased comparability. Neel 2017 whose IFRS adoption consequences have been examined only by a limited number of prior studies (e.g., Gross 2016). As mentioned earlier, the measure developed by Kim et al (2013) can be potentially used for firms which do not have listed equity; as described in more detail in Section 2.2.2.4, this measure could be modified to obtain a firm-year (or quarter-year) specific indicator of comparability.…”

“…The hypothesis that auditor-fixed effects are jointly zero is rejected, suggesting that audit style plays a significant role in determining comparability. Gross (2016) examines the de facto accounting comparability between private German firms that mandatorily report under local GAAP and similar firms that voluntarily report under IFRS before and after a major accounting standards reform ('German Accounting Law Modernization Act'). This accounting standards reform aligned parts of local GAAP reporting (such as provisions, deferred taxes, intangible assets, or inventory valuation) to IFRS but did not introduce full IFRS reporting.…”

The effects of accounting standards on the financial reporting properties of private firms: evidence from the German Accounting Law Modernization Act

“…The release of the first financial statements that adopted the German Accounting Law Modernization Act led to several studies examining their effects on accounting numbers and disclosures. One research stream focuses on the similarities between the new German GAAP and IFRS (Froschhammer and Haller 2012;Gross 2016;Pierk and Weil 2012;von Keitz et al 2011). More specifically, the articles in this research stream analyze whether listed firms use the new set of accounting standards to align their German GAAP financial statements with their IFRS counterparts.…”

“…Instead, they seem to remain in line with their tax accounting. Furthermore, Gross (2016) analyzes the effects on the comparability of private local GAAP and IFRS companies. Using aggregated output-based measures of de facto comparability, this author provides evidence for a significant increase in the comparability of accounting practices between German GAAP and IFRS companies following the adoption of the new accounting standards.…”