INTERNATIONAL REPORTING STANDARDS

International Reporting Standards

Executive Summary

The motivation for this research is the recent debate among auditors, regulators, the accounting bodies, firms and other commentators on the impact of A-IFRS on different types of firms, and the lack of empirical data on contentions made in that debate.

Public comments speculating on the impact on firms of the transition to A-IFRS date back to at least 1997, when the Australian Federal Government released the CLERP 1 discussion paper. However, in recent times, the extent of public debate has increased. For example, in early 2005, 25 submissions were made to the Parliamentary Joint Committee on Corporations and Financial Services (hereafter the Committee) inquiry into Australian accounting standards detailing different views on the effects of A-IFRS. A common theme in much of the recent comment is that firm size is an important discriminatory variable. In the present paper, we measure size by total assets at financial year end.

Some argue that smaller-sized entities should be allowed more time to implement A-IFRS because those entities are relatively under-prepared and less able to access the requisite accounting skills. For example, the Australian Institute of Company Directors (AICD, 2004, p. 6) echoed small business' concerns on the transition to A-IFRS in a discussion paper submitted to the Committee. In that paper it is stated that smaller companies are at “… a greater disadvantage in moving to IFRS than larger companies”. Thirteen supporting reasons are given but the thrust of the argument is that the costs on smaller entities do not justify the benefits from A-IFRS. For example, it is stated in the discussion paper that “… It is the cost of restatement of the past that will fall heaviest on smaller companies ?…?” (AICD, 2004, p. 6). The Institute of Chartered Accountants in Australia also supported some relief for small- and medium-sized entities in its submission to the Committee (ICAA, 2005, p. 2). These arguments appear to have persuaded the Committee to support account lodgement relief for smaller entities (see for example, Senator Wong's (2005) speech in the Senate). However, submissions from second tier accounting firms generally disagree with this line of thinking. Pannel Kerr Forster (PKF, 2005, p. 1), for example, in arguing against a delay in the transition to A-IFRS for small- and medium-sized entities, state:

It is unlikely that most small and medium sized Australian companies will need to establish new or complex systems …

This view is also held by Pitcher Partners and the National Institute of Accountants (Pitcher Partners, 2005, pp. 1-2; NIA, 2005, p. 2). We provide evidence relevant to this debate on the onerousness of A-IFRS on firms, for three different firm size groups.

Table of Contents

Executive Summary2

1. Introduction7

UK Accounting Standard9

Profit is more important10

Substance over Form13

Stocks and Long term contracts16

What Is a Construction Contract?18

2. Theoretical background20

Contribution of IFRSs20

Managerial behaviour23

3. Research hypotheses27

Earnings management27

Value relevance34

4. Research structure39

Datasets and empirical methods39

5. Empirical results42

Descriptive statistics42

Earnings management52

Value relevance58

Brief review of AASB 1 requirements65

Major items changing net income and equity71

Income tax71

Share-based payments72

Goodwill73

Restoration provisions73

Impairment73

FX translation74

Intangibles - other than goodwill74

Superannuation75

Financial instruments75

Revenue ...