The aim of this thesis is to examine the legal situation with regard to the IFRS-transition in Sweden. Sweden has a close linkage between accounting and taxation, which means that accounting rules have a material impact on taxation. IFRS currently applies only on group level, and the group is not subject to tax. However, there are already indirect tax effects to be seen since accounting practice in Sweden has changed due to IFRS. The most significant potential effect on taxation in a Swedish context is fair valuation of certain assets. If IFRS is applied on legal-entity level under current tax rules, unrealized gains would set the realization principle and the principle of economic double taxation out of play. Therefore, the linkage is threatened by IFRS’s accounting philosophy and is currently subject to scrutiny by an investigating committee that will issue a solution in 2007.
This thesis examines effects on taxation due to the IFRS-transition in Sweden. The purpose is to investigate the legal situation with regard to this transition. The linkage between accounting and taxation convey that the legal situation of accounting is examined as the field has a material impact on taxation. Furthermore, the thesis investigates both current effects of the transition and effects that would arise assuming that IFRS is applied on legal entity level. The presentation of these hypothetic effects are justified by the current discussion in Sweden on whether or not to permit IFRS-compliance on legal-entity level and furthermore, by the efforts to converge to IFRS within the boundaries of national law. Based on these discussions, the thesis concludes by discussing the suitability of admitting IFRS affect the Swedish tax system, i.e. if IFRS calls for disengagement between accounting and taxation.
The outline and approach of the thesis has been designed for an international audience since it is written within the Wintercourse project under the Stockholm School of Economics Department of Business Law. A draft of the thesis was presented at the EUCOTAX Wintercourse which took place at the University of Tilburg in April 2006. Finally, the thesis does not claim to be exhaustive with regard to the effects on the covered fields, but rather to highlight the key developments and effects brought on by the Swedish IFRS-transition.
The purpose of the IASB Framework for the Preparation and Presentation of Financial Statements is to describe the basic concepts underlying financial statements prepared in accordance with IFRS. The Framework defines the objective of financial statements, identifies the qualitative characteristics that make information in financial statements useful and defines the basic elements and concepts of recognition and measurement in financial statements.
The Framework is not a part of IFRS, and hence does not override potential contraventions with existing IFRSs. However, it makes the principles-based approach of the IASB possible by providing guidance for resolving questions without need for increasingly specific standards, extensive interpretations and other detailed implementation guidance. The Framework is concerned with general purpose financial statements.21 Such financial statements are directed towards the common information needs of a wide range of users, e.g. shareholders, creditors, employees and the public at large. According to the Framework, the objective of financial statements is to provide information about the financial position, performance and cash flows of an entity that is useful to these users in making economic decisions, i.e. to provide decision usefulness
IFRSs are accounting standards developed for world-wide applicability and the primary purpose is to satisfy the information needs of owners and other investors. As such, they lack linkages to any specific economic or legal environment. The set of rules is investor oriented in the sense that it aims to generate financial statements with focus on decision usefulness. This implies that compliance with IFRS provides forward-looking reporting. The Framework provides a foundation of common definitions and qualitative characteristics that serves as a tool of reference to several parties and secures the principles-based approach. Principles-based accounting systems leave room for judgment but the Framework ensures that this judgment does not amount to a free choice in the hands of the preparers.
IFRS in the EU
The Fourth Directive marked the advent of accounting harmonization in the EU.49 The Directive requires limited liability companies to prepare financial statements that show a true and fair view of assets, liabilities, financial position and result. Furthermore it states how financial statements are to be prepared. The Fourth Directive was followed by the Seventh Directive50 which contains requirements on the preparation of consolidated financial statements. These two Directives are commonly referred to as the Accounting Directives. Although the Accounting Directives provided a common ground for accounting in the EU, the frequent occurrence of options and the non-consistent implementation among member states hampered comparability of financial statements cross-borders.
A Commission communication in 2000 proposed that all companies listed on a regulated market should be required to prepare their consolidated accounts in accordance with IFRS. In addition, the Accounting Directives were proposed to be subject to modernization as they would continue to provide the basis for financial reporting by all limited-liability companies in the EU.51 The modernization efforts should reduce conflicts with IFRSs and bring the Directives up-to-date with modern accounting developments.52 In addition, the communication highlighted the need for legal endorsement of IFRSs on the EU-level
Effects of the IFRS-transition
Accounting in Sweden is serving many different purposes. The result according to the accounts determines the distributable amount and lays the foundation for taxation. These facts are explanatory for the traditional significance of the prudence principle and valuation at historical cost in Swedish accounting. Conservative accounting protects creditors and minimizes the discrepancy between the purposes of accounting and taxation. Indeed, accounting has traditionally been developed with concern to the fields that depends on the accounting records. Therefore, major contradictions between the systems have been avoided.
This harmony is now coming to an end. Sweden is in no position to refrain from a close alignment to international accounting developments and as IFRS got legally enforced by the EU through the IAS Regulation, the need for a close convergence to the principles of this set of rules has become emergent. From an accounting point of view, Sweden is well prepared. RR has issued recommendations based on IFRS since the foundation with the purpose to create standardised accounting on the basis of a market perspective by ensuring relevance and a high level quality of financial statements. This approach rearranged the hierarchy of stakeholders as it declared the stock market instead of the creditors as the most important receiver of accounting information.
Using the IASB Framework for standard development on national level enables a more conceptual view on accounting issues that aims to accomplish qualitative characteristics. Kellgren claims that the Framework in the long run is likely to supersede the position of the traditional accounting principles of e.g. prudence, realization and historical cost in Sweden.196 The ongoing internationalization on the field of accounting is so influential that a paradigm shift can be claimed to take place.
This is not surprising as Sweden is a small country with several large multinational companies (MNCs). IFRS certainly provides an improved business-economic approach to accounting in comparison to what the traditional Swedish accounting system offered. Thus, from a capital market perspective this development is satisfactory. RR has facilitated the transition through an early start, and in addition the institutional accounting environment in Sweden makes transitions like these relatively smooth. However, there are some considerations to assess regarding the Swedish institute of standard setting, especially in the light of the current internationalization.
Thesis Done By Karolina Levin, Stockholm School of Economics
Lodin, Sven-Olof; Lindencrona, Gustaf; Melz, Peter; Silfverberg, Christer, Inkomstskatt – en läro- och handbok i skatterätt. Part 2, Studentlitteratur, 10nd ed., Lund, 2005
Norberg, Claes, Har kopplingen mellan redovisning och beskattning förstärkts? from Festskrift till Gustav Lindencrona