Relevance and faithful representation are the two primary qualitative characteristics of useful accounting information widely acknowledged by accounting standard setters (e.g., FASB, 2010; IFRS Foundation, 2018a). Therefore, we employ them as our key measures of earnings usefulness, drawing on the approaches of prior earnings quality studies that sought to gauge these two measures (e.g., Kim and Kross, 2005, Richardson et al., 2005, Bandyopadhyay et al., 2010). Thus, we connect earnings relevance and faithful representation to the ability of earnings to forecast future operating cash flows and future earnings, respectively. If comparability enhances these connections, usage of more comparable earnings data is expected to aid investors and creditors in reliably estimating a firm’s future performance and making sound economic decisions in light of such.
- Companies’ internal accounting systems have been revolutionised over the past 40 years using sophisticated technology.
- Their major finding was that the readability of text and use of numbers in annual filings of foreign firms were clearer and with more numbers than US firms.
- In addition to including separate interactions of industry and country fixed effects with book equity and net income, we re-estimate the baseline regression model from Eq.
- We adopt the Gioia et al. (2012) qualitative theoretical framework to frame our literature review and to prescribe an organizational dynamics change to achieve CFR globally (see Fig. 1).
Third, we propose an international organization dynamic that is forward-looking as a next step in instituting CFR across national jurisdictions. These results could be useful to national standard setters and the IASB in meeting its “usefulness” objective and CFR characteristic, and useful to national accounting regulators and investors in achieving a more efficient global capital market. To address our research questions, we analyze a sample of 491 Canadian publicly traded companies comprising 3,928 firm-year observations over the 2011–2018 period. While the study employs post-IFRS adoption data only to study our research questions, the findings can further capture the impact of IFRS adoption on the quality of Canadian financial reporting.
Financial statement comparability and the informativeness of stock prices about future earnings
Although the U.S. and some other countries don’t use IFRS, currently 167 jurisdictions do, making IFRS the most-used set of standards globally. For example, if a company is spending money on development or on investment for the future, it doesn’t necessarily have to be reported as an expense. IFRS specify in detail how companies must maintain their records and report their expenses and income.
The Role of Auditing in Global Comparability of Financial Reporting
Using firm and year fixed effects removes the average cross-sectional effects and the average time effects from the system. As in this standard setting, our identification comes from the interaction of country and peer-country and not from the average effects of country and peer-country per se. GAAP_PROX captures the country-pair GAAP distance by summing up differences between two countries based on the GAAP differences measure presented in Bae et al. (2008, Table 1). The variable is multiplied by minus one and recoded to be distributed between −1 and 0 so that larger (less negative) values indicate more similar accounting regimes. For both measures, larger (less negative) values indicate more comparable financial accounting information. Comparability is the level of standardization of accounting information that allows the financial statements of multiple organizations to be compared to each other.
Panel A of Table 9 shows the explanatory power of private firms’ reporting for M&A valuations separately for private firms that follow local GAAP and for those that follow IFRS using the model in Eq. The differences in adjusted R2s between private firms that follow IFRS and those that follow local GAAP range from 7.7% to 11.1% across the different specifications and are statistically significant in all specifications. These results suggest that the value relevance of the financial reporting of private firms is higher when it has higher accounting comparability to public firms’ reporting, which is consistent with our results in Table 4. In panel B of Table 9, we present results from repeating the analysis shown in Table 7 using the model in Eq. Again, consistent with our original findings, the results suggest that the difference in value relevance between IFRS and local GAAP firms is more pronounced for private firms that operate in industries with more public peer companies.
1 Accounting comparability and value relevance
For example, the EFRAG is a European advisory group, FASB in a national standard setter, etc.
Moreover, since investors generally place more weight on information they better understand (Kim and Verrecchia 1991), this spillover of information from public valuations plausibly leads them to place greater weight on private firms’ reported financial information. Thus these investors may exploit price production in public stock markets to substitute for other information sources and costly private information collection, for example, https://adprun.net/ through extensive due diligence (Wangerin 2019). Second, our findings contribute to the nascent literature on the effect of public peer information on private firms. While there is extensive research on the impact of comparables pricing and the spillover of information across public firms (e.g., Foster 1981; Han et al. 1989; Young and Zeng 2015), only a few studies examine the impact of spillovers from public to private markets.
Guides to financial statements
IFRS Accounting Standards address this challenge by providing a high-quality, internationally recognised set of accounting standards that bring transparency, accountability and efficiency to financial markets around the world. International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world. The results suggest that the standards setting bodies’ (IASB) strategy on promoting the IFRS and objectives to develop a standard that leads to increase the financial statement comparability have been achieved.
They were established to create a common accounting language that could be understood globally by investors, auditors, government regulators, and other interested parties. A recent inquiry has recommended that the Australian Government take appropriate action to make digital reporting standard practice in Australia.36 As members of the accounting profession—practitioners, teachers and researchers—this is an area where we can make a valuable contribution. I hope you will be change facilitators in the discussions ahead on this initiative and that your research will provide evidence that leads to sound policy making. Thank you for the opportunity to address you today on the topic of digital financial reporting. That PDF looks much like a paper annual report, those weighty documents that were once posted to shareholders. For many Australian companies the digital part of the annual report is in the information system that produced the report.
This review activity could initiate firstly on a voluntary basis as a way to assess its impact on financial markets and investors. Only at a later time, would it be possible to understand whether there is evidence to mandate this IOSCO comment review letter process for all cross-border listed firms stating IFRS compliance. This approach would bring cross-border listed firms’ IFRS financial reporting closer to CFR. Investors, then, would be better able to compare the financial reports of IFRS firms of different regulatory jurisdictions. It is widely acknowledged that without an effective global enforcement system, it is difficult to achieve further improvements in financial reporting through the adoption of high-quality accounting standards (Quagli et al. 2018). Extant studies highlight that the global accounting system lacks a consistent rigorous enforcement mechanism to ensure consistent and quality reporting of IFRS-compliant financial reports across legal jurisdictions (Kleinman et al. 2019; Mohammadrezaei et al. 2013).
The adoption of IFRS, comparability of financial statements and foreign investors’ ownership
We found significant overlap in the answers that we received from the M&A experts, which suggests that there generally is consensus in their views on the use of private firms’ accounting information for valuation purposes. The subsections below indicate the general topic area under discussion when the interviewees made the following statements. ifrs comparability data Around the world, various government initiatives have required or permitted entities to file financial information in digital format. ASIC gives companies choice regarding lodgement of financial reports—paper, PDF, XBRL, iXBRL. Given a choice, listed companies need a compelling case to take on an activity that consumes resources.
In fact, each element in the application and adoption of IFRS would need to be perfected. However, we believe that pursuing the consistency of enforcement at a global level could be an additional way to mitigate sources of incomparability of financial reporting of cross-border listed firms due to ambiguities in adoption and application of IFRS. Notwithstanding, there are multiple factors that affect global capital market efficiency for which we do not address in our proposed organization dynamics change.
Some participants emphasized that, relative to information about public targets, information available about private firms is generally limited. For instance, there tends to be less information provided by intermediaries, such as analysts and the business press. The responses we received suggest that financial statement information is a critical input in the interviewees’ valuations for private firms and, in many cases, is one of the few relevant sources of information available. Companies will probably continue to conform to their societal norms and local environments. Hence, we suggest our organization change dynamic as a means to mitigate, not totally eliminate, incomparability in IFRS enforcement.