Ann Tarca

International Convergence of Accounting Practices: Choosing between IAS and US GAAP

The helpful comments of Garry Biddle, Steven Cahan, Sid Gray, Chris Nobes and Richard Morris are gratefully acknowledged, as is the contribution of seminar participants at the AAANZ 2001 PhD Colloquium, AAA International Group mid-year meeting 2002, University of Aberdeen, Monash University, University of New South Wales, University of Technology Sydney and the University of Western Australia. The author thanks her PhD supervisors Professor Philip Brown and Associate Professor David Woodliff for their encouragement and the AAANZ and AAA International Group for their generous provision of PhD scholarship funds.

An Investigation of Compliance With International Accounting Standards by Listed Companies in the Gulf Co-Operation Council Member States

This study investigates the extent of compliance with international accounting standards (IASs) by companies in the Gulf Co-Operation Council (GCC) member states (Bahrain, Oman, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates). Based on a sample of 137 companies (436 company-years) we find that compliance increased over time, from 68% in 1996 to 82% in 2002. Despite strong economic and cultural ties between the GCC states, there was significant between-country variation in compliance and among companies based on size, leverage, internationality, and industry. The study provides evidence of de jure but not de facto harmonization in the region. Noncompliance reflected some ineffectiveness in the functions of external auditors and enforcement bodies, which may be of interest to countries that have adopted IASs recently.

A commentary on issues relating to the enforcement of International Financial Reporting Standards in the EU

Abstract The adoption of International Financial Reporting Standards (IFRS) is supported in many countries because it may improve the quality and international comparability of financial reporting. However, these goals are less likely to be achieved without regulatory oversight that promotes rigorous and consistent use of IFRS. Consequently the European Union (EU) is requiring all member states to introduce enforcement bodies by 2005, the date of IFRS adoption in the consolidated financial statements of all EU listed companies. We review ongoing activities in France, Germany, the Netherlands and the UK in setting up and modifying enforcement bodies before 2005. We test current developments against the Fédération des Experts Comptables Européens (FEE) (2002) recommendations and against the principles for effective enforcement proposed in CESR Standard No. 1 on Financial Information. We present the views of people involved in financial reporting standard setting and enforcement from these countries, as well as the IASB, FEE and EFRAG, about the challenges of achieving effective uniform enforcement. Our paper will be of interest to people developing or participating in enforcement bodies, and to capital market participants who will be subject to the various regulatory regimes.

Politics, Processes and the Future of Australian Accounting Standards

The perspective of public interest and interest group theories of regulation is adopted to consider the future of Australian accounting standards following major reforms proposed by the Australian Commonwealth government as part of its 1997 Corporate Law Economic Reform Program (CLERP). Interest groups in the Australian environment are identified. Their lobbying had influenced the initial proposals; and their reactions when the CLERP proposals were published resulted in substantial modifications to the CLERP proposals, which had initially recommendedthat International Accounting Standards (IASs) be adopted as national standards from 1 January 1999. The role of accounting standards and the structure of standard setting are explored. The political nature of standard setting is illustrated through a review of the CLERP proposals, submissions of various interest groups and the government’s responses to them. The central arguments are that key assumptions underlying the CLERP proposals are flawed, and that the CLERP proposals could not achieve the outcomes desired of them. It seems inevitable, however, that international standards eventually will supplant domestic standards. In the longer term, Australian standard setters seem destined to have a diminished role in the international standard setting arena.

Financial Performance Explanations and Institutional Setting

Abstract The aim of this study is to investigate whether country differences in the institutional setting for financial reporting affect the attributes of managers’ explanations of performance in management commentary reports. We include 172 listed companies from five industries (building materials, food processors, pharmaceuticals, biotechnology and retail) in the UK, Australia, the USA and Canada in 2003. We find significant country differences in attributional properties of performance explanations in management commentary reports. The US and Canadian companies are generally less assertive and less defensive in causal explanations offered compared to their counterparts in the UK and Australia. The North American companies are also more extensive and formal in their explanations, relying more heavily on technical‐accounting language. These tendencies are most pronounced in the USA, where the aggregate of private and public enforcement is greatest. Taken together, our evidence suggests that higher expected regulatory and litigation costs induce a more elaborative, but risk‐averse explanatory stance that may well reduce the overall incremental value of the explanations offered.

Disclosure Incentives, Mandatory Standards and Firm Communication in the IFRS Adoption Setting

We investigate the content, timing and relevance of firms’ narrative disclosure about the effects of IFRS adoption in annual statutory financial statements and firm announcements to the stock exchange for 150 large listed Australian firms in the three-year period surrounding adoption (which occurred from 1 January 2005). We observe communication about changes in financial reports, even when the change relates to accounting rather than economic events. We record more disclosure by firms experiencing an adverse change in earnings, consistent with them being sensitive to signals about future earnings. When economic performance is stronger, firms provide less discussion of the accounting effects of IFRS. We also find the discussion of IFRS impact in both disclosure channels is value–relevant for firms with relatively higher levels of disclosure, providing evidence of the usefulness of transition disclosures.

ASIC Actions: Canaries for Poor Corporate Governance?

Purpose - The purpose of this study is to investigate whether companies subject to an Australian Securities and Investment Commission (ASIC) action have poorer corporate governance than other companies. Evidence from the USA suggests such a relationship but the issue has not been investigated for Australian firms. Design/methodology/approach - The paper considers a matched sample of 240 companies, including 120 which were subject to 143 actions relating to; interpretation of accounting standards; the continuous disclosure regime; and other governance matters during the period 1998-2004. Findings - We find that companies subject to ASIC actions are less likely to comply with the Australian stock exchange (ASX) best practice governance recommendations and that the main area of difference relates to separation of the roles of the CEO and board chair. Research limitations/implications - We were able to investigate only 3 of 10 items in the ASX recommendations due to data availability. The sample of ASIC companies is not randomly drawn, thus our results are not generalisable the wider population of listed companies. Capital market consequences of ASIC actions, such as effect on share price, bid-ask spread, analyst following and cost of capital, are not considered and could be investigated in future research. Practical implications - The results suggest that, in relation to publicised cases, ASIC is effective in targeting more poorly governed companies, a positive signal for Australian capital markets. Originality/value - Few papers investigate ASICs publicised cases and no prior study has linked ASIC cases and corporate governance practices. The findings will be of interest to Australian capital market participants, some of whom question the benefits of corporate governance recommendations.

Do Attributes of Management’s Explanations of Financial Performance Matter for Analysts? An International Perspective

Aerts and Tarca (2010) study attributes of performance explanations in management commentary reports provided by 172 companies from five industries in the USA, Canada, the UK and Australia. They report that, compared to their counterparts in the UK and Australia, companies from the USA and Canada are generally less assertive and less defensive in explicit causal framing of accounting outcomes. They are also more extensive and formal in their explanations, relying more heavily on accounting-technical language in explaining performance outcomes. We investigate whether these differential attributional properties have economic relevance by considering their relationship with analyst forecast dispersion. Using a factor analysis based on firm-level characteristics of explanatory statements for 158 companies included in the above study, we find that defensiveness and extensiveness of performance explanations are negatively associated with analyst forecast dispersion, while assertiveness and formality are not. Our results suggest that analysts benefit from more detailed explanations and that they pick up defensive explanations while possibly disregarding more assertive explanations. Not surprisingly, the use of more technical-accounting explanations does not serve to reduce dispersion in forecasts. Our study brings together two strands of literature, being studies of explanatory patterns in narrative reports and studies investigating usefulness of narrative reports for analysts.

Foreign Firms in the Less-Regulated US Market

The effects of trading Level I ADRs in the US OTC market were investigated for 119 firms from Hong Kong, the United Kingdom (UK), Australia, Japan, South Africa, Germany and Brazil during the period February 1992 to April 2001. Since firms that undertake Level I ADR programs do not reconcile domestic accounting information with US GAAP and receive less scrutiny from analysts and regulators, it may be expected that the benefits of a Level I ADR program are limited. Surprisingly, we found that after commencement of a Level I ADR program 30% of sample firms showed at least one favorable change in accounting variables and market measures. Statistically significant increases in assets and equity capital and reserves were recorded by firms from five countries, and significant increases in debt by firms from four countries. When we account for changing leverage, the cost of equity capital (as measured by world market beta) was unaffected for 76% of firms, fell for 17% and increased for 7%. The results show that, even though US GAAP accounting and disclosure requirements are not met, trading Level I ADRs in the less-regulated OTC market has benefits for some firms.

Accounting for financial instruments with characteristics of debt and equity: finding a way forward

Accounting for compound financial instruments, that is those with characteristics of both debt and equity, has challenged accounting standard setters for decades. The principles developed to distinguish liabilities and equity and the application of these principles in IAS 32 have been widely criticised. In 2016–2017, the IASB was engaged in a project to improve IAS 32. Our study presents research that is relevant to the issues faced by standard setters, related to improving the definitions and enhancing presentation and disclosure of liabilities and equity. We discuss studies investigating the effects of the accounting classification requirements on firms’ financing choices and on users’ decision‐making, to examine the question, ‘Does the distinction matter?’ We then explore various approaches that may be pursued by the standard setters to improve accounting in this area and identify areas for future research.