Jacqueline Birt

Ownership, Competition, and Financial Disclosure

A firms incentive to disclose has been linked empirically to a range of variables including information asymmetry, agency costs, political costs, and proprietary costs. While the intuition underlying each of the variables seems plausible, Verrecchia (2001) argues that disclosure models can be characterized as an eclectic mingling of highly idiosyncratic economic-based models and challenges researchers to take the first steps to unification. First, we investigate the role of ownership and competition variables in explaining voluntary segment disclosures in Australian firms and find support for both these variables. Second, drawing on theory supported by the corporate governance, strategic management and industrial organization literatures we introduce a new economic variable that unifies both ownership and competition variables. We find that the unifying variable performs better than our model focusing on ownership and competition variables alone. We conduct a series of robustness tests on the model and find that its significance is not affected by the inclusion of disclosure control variables identified in prior literature, the change in standard, and acquisitions and disposals of physical assets.

Derivatives Use and Financial Instrument Disclosure in the Extractives Industry

This article documents the use and disclosure of derivatives in the Australian extractives industry. We find that derivatives are used by 23 per cent of our sample, with mitigation of commodity risk and foreign exchange risk being the most common purposes for which derivatives are used. The most common types of derivatives used in the sector for hedging purposes are forward rate agreements and options. Results indicate that derivative use is positively associated with financial risk and firm size. We also examine the relation between firm characteristics and the extent of financial instrument disclosure, using a disclosure index based on the additional requirements in IFRS 7 Financial Instruments: Disclosures. Empirical results reveal that large firms with higher leverage, which use derivatives, and are audited by a Big 4 auditor provide more extensive disclosure of financial instruments.

Lease Accounting: A Review of Recent Literature

Abstract Current lease accounting standards classify leases as either operating or finance leases. Operating leases do not require recognition of lease assets or lease liabilities on the balance sheet. Proposed changes to lease accounting would require a lessee to recognise assets and liabilities for most leases over 12 months and may improve the quality and comparability of financial reporting of the entity. In this paper we summarise the literature that can be related, directly or indirectly to the proposed changes by the IASB and the FASB on lease accounting. In summary, the literature highlights that the proposed changes would potentially have economic implications for both preparers and users of accounting reports; including changes to financial ratios, assessment of risk and providing an audit of the accounting reports.

Response of the EAA FRSC to the EFRAG/ANC/FRC Discussion Paper: Towards a Disclosure Framework for the Notes

We summarise the response of the EAAs FRSC to Towards a Disclosure Framework for the Notes, a Discussion Paper (DP) issued jointly by EFRAG, ANC and FRC. While supportive of much of the DP, and in particular of the underlying aim to place disclosures on a sounder conceptual foundation, we identify two broad themes for further development. The first concerns the DPs diagnosis of the problem, which is that the existing financial reporting is characterised by, on the one hand, disclosure overload and, on the other hand, an absence of a conceptual framework for organising and communicating disclosures. Our review of the literature suggests much greater support for the second of these two factors than for the first. The second broad theme is the purpose of the proposed DF, and the principles that are derived from this purpose. Here, we stress the need for the framework to better accommodate the context within which financial statement disclosures are used. In practice, this context is characterised by variation in information, incentives and enforcement, each of which has a considerable effect on the appropriate disclosure policy and practice in any given situation.

The Relevance to Firm Valuation of Research and Development Expenditure in the Australian Health-Care Industry

The health-care industry requires large expenditure on research and development (R&D), with many projects undergoing long development cycles, usually with uncertain outcomes. Extant research has mainly concentrated on the health-care industry in the United States, where R&D costs are expensed as incurred. Previous Australian research has found mixed results in relation to R&D expenditure and changes in share price. This study investigates whether R&D expenditure reported in the health-care industry since the introduction of IAS 38 is significantly associated with share price. Results of the study show that expensed R&D is value-relevant, while a comparison of the pre and post-IAS 38 periods (including pre-global financial crisis (GFC) and GFC periods) shows a statistically significant improvement in the explanatory power of the regression model post-IAS 38, suggesting that R&D expenditure reported under the new standard IAS 38 is more useful for decision-making by investors compared with reporting under AASB 1011.

XBRL and the qualitative characteristics of useful financial information

Purpose - eXtensible Business Reporting Language (XBRL) is an internet-based interactive form of reporting language that is expected to enhance the usefulness of financial reporting (Yuan and Wang, 2009). In the UK and the USA, XBRL is mandatory, and in Australia, it is voluntarily adopted. It has been reported that in the not too distant future, XBRL will be the standard format for the preparation and exchange of business reports ( Design/methodology/approach - This paper uses an experimental approach featuring a profit-forecasting task to determine if participants perceive XBRL-tagged information to be more useful compared to PDF-formatted information. Findings - Results reveal that financial information presented with XBRL tagging is significantly more relevant, understandable and comparable to non-professional investors. Originality/value - The authors address a gap in the literature by examining XBRL usefulness in Australia where XBRL adoption will be mandated within the not too distant future. Currently, the voluntary adoption of XBRL by preparers and users is low, possibly, because of a lack of awareness about XBRL and its potential benefits. This study yields significant implications for the accounting regulators in creating more awareness on the benefits of using XBRL and to create an impetus for XBRL adoption.

A Real-world Assessment Task for Postgraduate and Distance Students

A ‘motley crew’ (apologies to the band of the same name) would accurately describe this financial statement analysis class. The group consisted of 103 postgraduate distance education students, the majority of whom were working adults aged in their 30s to early 40s with family responsibilities. Many were based in regional Australia; others included expatriate Australians and overseas nationals resident in the USA, Canada, UK, Singapore, Denmark, Ukraine and Japan When I first taught this financial statement analysis course in 2006, all assignment questions were contrived fictional problems sourced from introductory accounting textbooks. At that time students’ motivation and enthusiasm were low and students got finicky about ‘right’ and ‘wrong’ answers for these short-answer questions. I remember thinking to myself: ‘Well, if you got the answers 100% “right” so what anyway?’ given that the questions were contrived, overly simplistic and lacked any real-world context. Also, marks were consistently too high. Finding an assessment task to suit the needs of this diverse cohort and my pedagogical concerns appeared at the outset to be a difficult task. Not only did I want to introduce a task that catered to the group, I also wanted a task which would encourage them to encounter first-hand concepts and tools in accounting and finance which could be utilized Accounting Education: an international journal Vol. 18, Nos. 4–5, 527–530, September–December 2009

What Is the Way Forward for IASB’s Research Programme under the Evidence-Supported Approach? Some Analyses and Comments Based on the 2015 Agenda Consultation

Abstract The purpose of this paper is twofold: (1) the paper reviews the International Accounting Standards Board (IASBs) evidence-supported approach to standard setting, in particular the very broad definition of evidence that does not distinguish between scientific evidence used for developing the normative foundation (the standards) and observations in practice. Based on comparisons with medicine and auditing, we argue that there are good reasons for the IASB to separate scientific evidence from other sources of information. As producers of scientific evidence, the academic community must consider whether better alignment between publishing incentives and standard setting can be achieved. (2) Examining the 2015 Agenda Consultation, the ‘top-five’ research projects were identified: ‘Disclosure Initiative – Principles of Disclosure’, ‘Primary Financial Statements’, ‘Financial Instruments with Characteristics of Equity’, ‘Business Combinations under Common Control’, and ‘Goodwill and Impairment’. In order to further support evidence-informed standard setting, we provide research-based comments on these projects (based on the European Accounting Associations Agenda Consultation comment letter).

The value relevance of exploration and evaluation expenditures

Purpose - – This paper aims to investigate the value relevance of the various components of exploration and evaluation expenditures in the Australian extractives industry. Whether exploration and evaluation expenditures is more value relevant, following the adoption of AASB 6, and whether it differs for firms engaged only in exploration when compared to those also engaged in mining production is also examined. Design/methodology/approach - – This paper uses a modified Ohlson model as a benchmark against which to compare an alternative valuation model featuring the disclosed components of exploration and evaluation expenditures. A sample comprising 430 firm-year observations between 2003 and 2009 is utilised. Findings - – Written-off exploration and evaluation expenditures and the number of projects in which firms are involved is relevant to investors when assessing the value of extractive firms. Further, the implementation of AASB 6 has led to an improvement in the relevance of exploration and evaluation information in assessing firm value. Research limitations/implications - – The sample is based on observations from the years 2003-2004 to the years 2006-2009. The authors do not incorporate 2005, as this is the first year the new standard was implemented, and there is the possibility of a settling in effect. The authors base our sample on the top 100 extractive firms in 2009. As such, these companies may not represent the accounting practices of smaller firms in the Australian extractive industry. Originality/value - – The authors address a gap in the literature by examining the value relevance of the detailed line items of exploration and evaluation expenditure reported by extractives firms. The authors also explore the effect of regulatory changes by examining the value relevance of exploration and evaluation expenditures pre- and post-International Financial Reporting Standards (IFRS) 6/Australian Accounting Standards Board (AASB) 6 implementation. Finally, the authors contribute useful findings to the standard setters’ ongoing deliberations aimed at producing a comprehensive standard on extractive activities by providing useful feedback on the relevance of accounting for pre-production costs under a regime using the “area of interest” method.