Measurement of de facto armonisation: The case of participating investments in Italy

With the issuing of Commission Regulation n. 1606/2002, which requires all EU listed companies to adopt International Financial Reporting Standards (IAS/IFRS) from 2005 onwards, the accounting harmonisation process in Europe has come to a relevant stage. The requirement of applying International Financial Reporting Standards (IAS/IFRSs) in Italy is producing several adapting issues since the International Accounting System is quite different from the Italian Accounting System. In particular, among EU countries, relevant cultural, social and economic diversities are observable in terms of typical proprietorship structure, average size of the firms, role played by financial institutions, especially banks, role played by investors and financial capital markets. Another difference concerns the different role of market reference for the valuation of assets and liabilities. Moreover, usually, the form prevails over the substance in the accounting representation of economic matters, especially in the accounting for consolidation purposes. On the basis of these premises, the adoption of IAS/IFRS’s and, more eminently, the introduction of International Accounting Standards for the consolidation accounting (IFRS 3 and IAS 27), means a radical change. The traditional focus on prudence as an essential characteristic of financial statements is to be broken, to apply a different concept of income, in which unrealized revenues are generally recognized in the income statement as an integral part of the financial performance of the firm. Drawn on this accounting innovation, the paper intends to investigate the relationship between the requirement for all Italian listed companies and groups to adopt International Financial Reporting Standards starting from 2005 and the degree of harmonisation in the financial reporting practice with reference to the valuation of Investments in Subsidiaries ( IAS 27), Investments in Associates (IAS 28), Investments in Joint Ventures (IAS 31) and other investments (IAS 39), picking out a sample of listed Italian groups consolidated financial statement. The first step is the development of a framework for the identification of various objects whose degree of harmonisation will be investigated. Subsequently a method will be developed in order to quantify the degree of harmony in financial reporting practice for each of the selected items in the annual accounts. For this purpose, some harmonisation indexes will be applied like the Van der Tas H Index. Furthermore a sample of 125 Italian listed groups, 12 banks and 113 industrial groups will be selected. Finally a comparison between Banks and Industrial Groups will be undertaken in order to draw some conclusions.