FIGURE 5.1.4 – EXAMPLE OF RESTATEMENT COMPUTATION

4 _{Rinaldi, L., Gavana, G. IFRS 11: quali complessità nascondono le regole per la transizione? Rivista dei Dottori}

Commercialisti. Giuffrè. No. 4, 689. (2014).

139 FIGURE 5.1.5 – EXAMPLE OF RESTATEMENT COMPUTATION II

In line with studies in literature (e.g. Graham et al. (2003); Saccon et al. (2012); Demerens et al. (2014); Leitner – Hanetseder and Stockinger (2014)) variations have been calculated for some important financial measures, namely the components of the ROE as expressed by the Du Pont Model (Profit Margin * Leverage Ratio * Asset Turnover) and ROA (which may be decomposed as Profit Margin * Asset Turnover). The aim is to confirm previous results in literature.

It is worth recalling that Return on Equity measures the return generated on shareholders’ equity. A firm can create shareholders’ value (economic profits) if the ROE is higher than its cost of equity capital (the expected return shareholders require for investing in a certain company given its specific risk)5_{. Return on Assets, as well, is a profitability measure, computed as the ratio between} net income and total assets that reveals how the capital invested within the firm is able to generate profit and accordingly it permits to judge if assets are efficiently employed within the company6_. Profit Margin refers to the ratio net income over revenues, it is useful to evaluate the profitability of a business, because it measures how much profit a firm makes on every unit (€) of sales. Leverage Ratio calculated as total assets over shareholders’ equity indicates how a firm finances its activity, namely the assets it holds to run the business. Accordingly, a relatively high index might indicate that the company is mainly financing its business through debt7_.

5 _{Financial Times – Lexicon. Definition of Return on Equity ROE. http://lexicon.ft.com/Term?term=return-on-}

equity—roe.

6 _{Borsa Italiana – Glossario. Return on Assets. - Financial Times – Lexicon. Definition of Return on Assets ROA.}

www.borsaitaliana.it/bitApp/glossary.bit?target=GlossaryDetail&word=Return%20on%20Assets. http://lexicon.ft.com/Term?term=return-on-assets

7 _{Financial Times – Lexicon. Definition of Return on Equity ROE. http://lexicon.ft.com/Term?term=return-on-}

equity—roe.

140 After having analysed the significance of variations in different financial measures, the study strives to assess whether disclosures required in IFRS 12 are actually provided in footnotes or not. This last step aims to broaden the analysis run by Asenbrenerovà (2016) and evaluate whether really IFRS 12 requirements have improved companies’ disclosures about their investments in JVs. More specifically, the analysis is focused on checking the provision of summarised financial information for each material joint venture, which in the IASB’s view shall outweigh the benefits coming from proportionally consolidating, in the investor’s financial statements, the share of each joint ventures’ item.

5.2 Empirical Results – General Overview

This section presents the results obtained from the assessment of the implications caused by the introduction of IFRS 11. As expected and proved by previous studies in literature, the transition from proportionate consolidation to the equity method caused on average a decrease in total assets, total liabilities, operating revenues, operating expenses and EBIT in all the three European indexes analysed. As explained by academicians, these variations were imaginable given that under EM joint ventures’ assets, liabilities, revenues and expenses are no longer proportionally consolidated, while only a single line item depicting respectively the net investment on the balance sheet and the profit in the income statement is reported. On average, even the decrease in EBIT can be justified because the JVs’ share of EBIT is not included in the venturer’s income statement. However, as remarked by Leitner – Hanetseder and Stockinger (2014), the impacts on EBIT are not so straightforward as the effects depend on whether the entity or its joint ventures report a positive operating profit. For instance, if the joint ventures show a negative EBIT, a transition to equity method would bring the group’s EBIT to rise, as a negative result would not be proportionally included8_{. By contrast, those} firms whose joint ventures significantly contribute to increase operating profit would experience a material decline in EBIT. Following the materiality threshold recognised by Leitner – Hanetseder and Stockinger (2014), even in this study variations are judged to be material if they are above a materiality threshold of 5%. Accordingly, on average, material changes occurred in IBEX 35 with total liabilities decreasing on average by -5.07% and EBIT by -8.61%. In those firms listed in FTSE MIB, significant variations occurred on average for operating revenues, expenses and EBIT with decreases of -6.21%, -5.33% and -93.19% respectively. Concerning CAC 40, no material change occurred, even if the greatest variation came up in the EBIT with an average decrease of -4.05%.

8 _{Leitner – Hanetseder, S., Stockinger, M. How does the elimination of the proportionate consolidation method for joint venture} investments influence European companies? ACRN Journal of Finance and Risk Perspectives. Vol. 3, Issue 1, 1-18.

141 Table 5.2.1 shows a summary of the variations occurred in IBEX 35, FTSE MIB and CAC 40 by highlighting the percentage value of the mean, median, min. and max. per each financial item. On average changes in total liabilities are more relevant than those in total assets. Even the medians, which remove the effects of too high or too low observations, confirm this trend, apart from FTSE MIB, whose median variation in total assets is slightly higher (-2.35%) than the one in total liabilities (-2.15%). Interestingly, in all three indexes the most significant change appeared in the EBIT with decreases on average by -8.61% in IBEX 35, -93.19% in FTSE MIB and -4.05% in CAC 40. The value of the median for all three indexes is of course lower than the respective mean, -2.72% against -8.61% in IBEX 35, -9.73% against -93.19% in FTSE MIB and -2.80% against -4.05% in CAC 40.

TABLE 5.2.1 – SUMMARY OF THE VARIATIONS IN IBEX 35 – FTSE MIB – CAC 40