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Emerald Article: The impact of international financial reporting standards: does size matter? John Goodwin, Kamran Ahmed

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To cite this document: John Goodwin, Kamran Ahmed, (2006),"The impact of international financial reporting standards: does size matter?", Managerial Auditing Journal, Vol. 21 Iss: 5 pp. 460 - 475 Permanent link to this document: http://dx.doi.org/10.1108/02686900610667247 Downloaded on: 20-11-2012 References: This document contains references to 21 other documents Citations: This document has been cited by 11 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 3725 times since 2006. *

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MAJ 21,5

The impact of international nancial reporting standards: does size matter?

John Goodwin
School of Accounting and Law, RMIT University, Melbourne, Australia, and

460

Kamran Ahmed
School of Business, La Trobe University, Bundoora, Australia
Abstract
Purpose This study seeks to examine the impact of Australian equivalents to international nancial reporting standards (A-IFRS) on the accounts of small-, medium- and large-sized rms. Design/methodology/approach For 135 listed Australian entities, the half-yearly accounts ended 30 June 2005 are examined to identify the effects of A-IFRS. Data are gathered on the change in major balance sheet and income statement elements, the major reconciling items and earnings variability. Findings Findings show that more than half of small rms have no change in net income or equity from A-IFRS, and that there is an increase in the number of adjustments to net income and equity with rm size. The study also nds that A-IFRS has increased net income for small- and medium-sized rms. Equity has increased (decreased) under A-IFRS for small (large) rms. Small rms experience higher earnings variability than medium-sized or large rms under A-IFRS. Research limitations/implications The sample is limited to 31 December reporting date rms and not all A-IFRS must be complied with when rms restate their comparatives. Practical implications Analysts, auditors and other account users should be aware that the effects of A-IFRS are correlated with rm size. Originality/value This is the rst Australian empirical paper on the effects of A-IFRS. It raises doubts about the contentions of some that A-IFRS will have widespread adverse effects on rms accounts. Keywords Financial reporting, Accounting standards, Small enterprises, Medium-sized enterprises, Large enterprises, Australia Paper type Research paper

The objective of this study is to examine the impact of Australian equivalents to International Financial Reporting Standards (A-IFRS) on the accounts of small-, medium- and large-sized rms. More specically, this study seeks to answer the following four questions: (1) How onerous is the transition to A-IFRS? (2) How have net income, assets, liabilities and equity changed under A-IFRS? (3) Why has net income and equity changed under A-IFRS? (4) Is net income more variable under A-IFRS?
Managerial Auditing Journal Vol. 21 No. 5, 2006 pp. 460-475 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900610667247

The authors acknowledge the helpful comments from Max Aiken, Richard Heaney, Alex Martin, participants at the October 2005 Emerging Issues Discussion Group at the AASB and the anonymous reviewers. Any errors remain the authors responsibility.

The motivation for this research is the recent debate among auditors, regulators, the accounting bodies, rms and other commentators on the impact of A-IFRS on different types of rms, and the lack of empirical data on contentions made in that debate. Public comments speculating on the impact on rms of the transition to A-IFRS date back to at least 1997, when the Australian Federal Government released the CLERP 1 discussion paper[1]. 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 rm size is an important discriminatory variable. In the present paper, we measure size by total assets at nancial 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 benets 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 Wongs (2005) speech in the Senate). However, submissions from second tier accounting rms 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 . . .

International nancial reporting 461

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 rms, for three different rm size groups. Concerns have also been raised on the materiality of the impact of A-IFRS and predictions have been made of the effects on the accounts. For example, the head of the Australasian investor relations association, Ian Matheson, said in June 2005:
In some cases, the IFRS changes will have a material bearing on the companies reported results . . . (Bufni, 2005).

Wayne Cameron, Technical Director of RSM Bird Cameron claimed that generally small rms balance sheets will be weakened by A-IFRS and that except for intangibles . . . the SMEs are caught just as much as the big boys (Andrews, 2005). Conversely, the chairman of the Australian Accounting Standards Board (AASB)[2] David Boymal, stated in February 2005:

MAJ 21,5

I think most of [the SMEs] are in for a pleasant surprise that it was not such an onerous thing as they were rst led to believe with a few exceptions (Andrews, 2005).

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The former chairman of the AASB, Keith Alfredson has a similar view to that of Boymal (Alfredson, 2005, p. 2). We report the percentage changes for key account totals for small, medium and large rms and provide reasons for those changes, to shed light on this aspect of the debate. Many commentators have claimed that earnings variability will increase under A-IFRS for small- and medium-sized enterprises (SMEs). For example, Wayne Basford, National Technical Director of RSM Bird Cameron, said that the new standards will cause many SMEs to experience substantially more volatility (Andrews, 2005). Firms also predict increases in their earnings variability. In Tasmania Mines Ltds 2004 Annual Report, it is stated that increased variability may result from changes to the residual value determination under the A-IFRS depreciation standard (Tasmania Mines Ltd, 2004, Note 38). Additionally, it is stated in Oriental Technologies Ltds 2004 Annual Report that the prescription to discount cash ows when measuring recoverable amount is likely to increase earnings variability (Oriental Technologies Ltd, 2004, Note 1(r)). On the other hand some A-IFRS, such as AASB 120 may reduce earnings variability (AASB, 2004d). That standard requires grants used for asset acquisitions to be recognised in income over the life of the asset. Presently under A-GAAP, several R&D-intensive rms recognise that income up front (Electrometal Technologies Ltd, 2004). Whether earnings variability has changed under A-IFRS for specic rm sizes is an important question that this study also seeks to answer. Our study provides evidence on the impacts of A-IFRS, with specic reference to the abovementioned four research questions, for 135 disclosing entities that have 31 December annual reporting dates. We divided our sample into three groups of 45 rms based on total assets at nancial year end, and classied them as small, medium and large rms. The results indicate that more than half of small rms have no change in net income or equity from A-IFRS, and that there is an increase in the number of adjustments to net income and equity with rm size. We also nd that A-IFRS has increased net income for small- and medium-sized rms. The impact on large rms is negligible. Equity has increased (decreased) under A-IFRS for small (large) rms. The impact on medium-sized rms is negligible. The highly material changes to net income and balance sheet elements are limited to a relatively small number of rms irrespective of size. Small rms experience higher earnings variability than medium-sized or large rms under A-IFRS. These results should assist interested parties to focus on those entities where the A-IFRS effects are expected to be important. Brief review of AASB 1 requirements Under AASB 1, reconciliations from A-GAAP to A-IFRS are required for net income and equity (AASB, 2004a). Specically, paragraphs 39 and 45 require disclosing entities with a 31 December year end, to provide reconciliations to A-IFRS net incomes for their 2004 year and 2004 half-year net incomes under A-GAAP, and to their A-GAAP equity at 1 January 2004, 30 June 2004 and 31 December 2004. We mainly use the full year (2004) reconciliations and equity at the most recent date, namely 31 December 2004 in this study. In our analyses of earnings variability, however, we also use half-year earnings and earnings changes to improve robustness of the results.

There is no prescribed format for the reconciliations but AASB 1, requires an explanation of:
. . . how the transition from previous GAAP to A-IFRS affected its reported nancial position, nancial performance and cash ows (AASB, 2004a, paragraph 38).

International nancial reporting 463

Further, paragraph 40 states that the reconciliation:

. . . shall give sufcient detail to enable users to understand the material adjustments to the balance sheet and income statement . . . .

In our reading of the reconciliations we were able to ascertain the reasons for the reconciling items for the sample rms. Data We selected all rms with a 31 December nancial year end from Aspect Huntley Pty Ltds Finanalysis database which gave a total of 197 rms. Thirty-four rms were deleted because they used non-Australian GAAP and 26 because the accounts were not available. The sample was further reduced by two rms who restated under A-IFRS in foreign currency. The nal sample comprises 135 rms which we partition into three groups based on total A-GAAP assets at 31 December 2004. Table I shows descriptive statistics for the nal sample. Results onerousness of A-IFRS In this section, we examine the question of how onerous is the transition to A-IFRS for small, medium and large rms. There is no established measure of onerousness and a number of measures are possible, such as the change in audit fees and questionnaire responses. Owing to lack of data and time constraints, we use the number of reconciling items and the percentage of rms that have changes in their net income and equity as our two measures. These measures are likely correlated with the cost of

Small (n 45) ($m) Net income Mean Median Total assets Mean Median Market value of equity Mean Median 2 1.69 2 0.79 7.12 6.20 14.83 8.76

Medium (n 45) ($m) 3.66 0.29 61.94 47.01 99.15 47.60

Large (n 45) ($m) 148.54 40.06 4,379.92 751.47 2,395.25 549.21

Notes: Net income, assets and market value numbers are millions. Net income is A-GAAP net income for the year ended 31 December 2004. Assets is A-GAAP-measured total assets at 31 December 2004. Market value is measured at 31 December 2004. Small rms have total assets within the bottom one-third of the sample based on total assets at 31 December 2004. Medium rms are within the middle one-third of the sample based on total assets at 31 December 2004. Large rms are within the top one-third of the sample based on total assets at 31 December 2004

Table I. Descriptive statistics for the samples

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compliance with A-IFRS. By reconciling items, we mean those descriptors used by rms in their net income and equity reconciliations required under AASB 1 (AASB, 2004a). For example, reversal of goodwill amortisation and impairment of property are counted as two reconciling items. Table II shows the percentage of rms that had no change in net income or in equity and the mean (median) numbers of reconciling items for each size group. The results for net income (Panel A) indicate a monotonic decrease in the percentage of rms that have no change under A-IFRS. Only two large rms (about 4 per cent) have no change in net income, but 58 per cent (26 of 45) small rms have no change in net income. A similar decline is observed for equity reported in Panel B. These percentages indicate that most small rms are unaffected by the different recognition and measurement rules under A-IFRS. The table also shows that the average number of reconciling items is 0.8 (median 0) for all small rms and 2.0 (median 2.0) for those small rms that had a net income change. There is an increase in these means and medians with rm size. These results suggest the change to A-IFRS is less onerous for small rms, which is consistent with the comments of some. Results effects on net income, assets, liabilities and equity In this section, we examine the contention of the materiality and direction of the effect of A-IFRS on net income for the 2004 year and on assets, liabilities and equity at 31 December 2004. We rst calculate the percentage change from A-GAAP to A-IFRS for each rm, and then the mean and median of those changes for each size group. Since, losses are coded as negative numbers in the Finanalysis database, the absolute value of the A-GAAP number is used as the base for the percentage calculations to avoid confounding results. Table III shows the grand means and medians of each rms percentage change in net income, assets, liabilities and equity, for all rms and for those rms that have changes in those items. The table also shows the percentage of A-IFRS numbers that
Small Panel A net income Percentage no change All rms mean All rms median Change rms mean Change rms median Panel B equity Percentage no change All rms mean All rms median Change rms mean Change rms median 58 0.8 0.0 2.0 2.0 53 0.8 0.0 1.8 2.0 Medium 11 2.2 2.0 2.4 2.0 16 2.0 2.0 2.4 2.0 Large 4 4.6 5.0 4.6 5.0 2 4.4 4.0 4.5 4.0

Table II. Reconciling items for net income and equity for small, medium and large rms

Notes: Percentage no change is the percentage of rms that have no change in net income or equity from A-IFRS. The mean (median) is the mean (median) of the number of reconciling items. Change rms are those rms that disclose a change in net income for the 2004 year or equity at 31 December 2004 by applying A-IFRS

Small Panel A net income All rms mean All rms median Change rms mean Change rms median A-IFRS , A-GAAP Panel B assets All rms mean All rms median Change rms mean Change rms median A-IFRS , A-GAAP Panel C liabilities All rms mean All rms median Change rms mean Change rms median A-IFRS , A-GAAP Panel C equity All rms mean All rms median Change rms mean Change rms median A-IFRS , A-GAAP 55.5 0.0 131.4 6.2 36.8 2 0.8 0.0 2 1.7 0.6 20.0 1.1 0.0 5.4 1.4 6.7 2.0 0.0 4.3 0.2 22.2

Medium 7.7 0.1 8.6 1.8 42.5 2 0.8 0.0 2 1.1 0.1 35.6 250.8 0.0 537.4 1.0 8.9 2 5.9 0.0 2 7.0 2 1.0 51.1

Large 0.0 0.0 0.0 0.0 51.2 2 1.9 0.0 2 2.1 2 0.2 46.7 17.4 5.1 20.0 5.9 8.9 2 19.6 2 7.5 2 17.7 2 7.6 77.8

International nancial reporting 465

Notes: Mean (median) change is the mean (median) of the percentage changes in that nancial statement item for each rm. Change rms are those rms that disclose a change in net income for the 2004-year or total assets, liabilities or equity at 31 December 2004 from applying A-IFRS. A-IFRS , A-GAAP is the percentage of A-IFRS numbers that are less than A-GAAP numbers for those rms that have different A-IFRS and A-GAAP numbers for net income, assets, liabilities or equity

Table III. Percentage effects of A-IFRS on various nancial statement items

are less than their A-GAAP counterparts. Looking rst at net income (Panel A), the results show that for small rms, the mean increase in net income from A-IFRS is about 55 per cent. Given that about 58 per cent of small rms have no change in net income (reported in Table II), the percentage change for those rms that report a different net income under A-IFRS to that reported under A-GAAP is a lot higher at about 131 per cent. Reasons for this change and the changes for medium- and large-sized rms are covered in the next section. There is a decline in these means with rm size as there is with the medians. The average medium-sized rm also experiences an increase in net income (mean 7.7 per cent, median 0.1 per cent). There is no bias upward or downward for large rms. The A-IFRS , A-GAAP is the percentage of rms with a change in net income that report lower net income under A-IFRS, and indicates that about 37 (63) per cent of small rms had lower (higher) net income under A-IFRS. There is a monotonic increase in these percentages with size indicating A-IFRS has a decreasing directional bias on net income with size. With respect to assets, all size groups have a mean decline but the percentages are small, ranging up to about 2 per cent for large rms. About 20 per cent of small rms have an asset decrease and this percentage increases with rm size. Nevertheless, most rms from each group experience an asset increase. Consistent with this are the

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medians for small- and medium-sized rms that have changes that are both positive and all three percentages for A-IFRS , A-GAAP are less than 50 per cent. Liabilities reported in Panel C have increased for all three size groups and again, an increase with rm size is generally evident. The large mean for medium-sized rms is due to one rm changing its liabilities from about $800,000 to about $29m under A-IFRS, which is an increase of over 3,500 per cent[3]. Over 90 per cent of rms that report a change have a liability increase for all three-size groups (the percentages for A-IFRS , A-GAAP are all less than 10). It is evident that A-IFRS has changed total liabilities more often and by larger amounts than total assets, irrespective of rm size. The mean increase to equity for small rms that change equity is about 4 per cent. By contrast, the mean decrease to equity for medium and large rms is about 7 and 18 per cent, respectively. Medians show a similar increasing trend in the negative effects on equity. Primary reasons for these results are covered in the next section. About 78 per cent of small rms have an increase to equity and this percentage decreases with size. About 78 per cent of large rms have an equity decrease. In sum, we nd the most detrimental effects of A-IFRS on net income and equity are in large rms. The equity declines for medium and large rms are driven by liability increases. Total assets have not changed materially for any size group. Small rms accounts show an overall healthier nancial position under A-IFRS compared with A-GAAP. Major items changing net income and equity The most common reasons for changes to net income and equity are examined in this section. We build on the previous section by explaining why, in broad terms, earnings and equity have changed for our three size groups. To undertake this analysis, the AASB 1-required reconciliation in the notes to the 2005 half-year accounts are used to gather the data for each rm. Table IV shows the mean and median percentage changes in A-GAAP net income for the top ten most common items affecting net income and Table V shows the same information for equity. In each case, we calculate the rm-specic percentage change as discussed in the previous section but the grand mean and median in Tables IV and V are only for those rms that report a change for that item. For instance, the average percentage increase to A-GAAP 2004 annual net income for the ve small rms that report a tax adjustment is 183 per cent and it is 33 per cent for equity at 31 December 2004. Income tax Small rms have the largest mean and median increase in net income from application of the tax accounting standard, AASB 112 (AASB, 2004c). The main reason for this is the recognition of deferred tax assets from tax losses that were unrecognised under A-GAAP due to the more stringent recognition test in AASB 1020 (AASB, 1989). In our sample, small rms reporting large tax benets and tax assets tend to have low prots and equity resulting in a mean (median) percentage increase to A-GAAP equity of about 33 (36). With respect to large rms, the tax effect of asset write-downs is the most common reason. One rm accounts for about half of the 10 per cent mean increase to net income for large rms, by recognising the tax benet on a highly material impairment loss. That rm also accounts for most of the mean impairment loss for large rms of about 79 per cent reported below.

Small 5 5 6 5 2 4 4 0 1 2 4 38 21 2 10 88 131.4 21 2 10 2 24 6.2 17 19 19 6 7 4 5 2 3 4 11 97 33 26 21 18 9 9 8 13 9 7 31 184 183 2 17 220 26 2 12 4 13 4 2 13 15 21 6 19 29 2 0.4 2 33 85 25 8.6 10 28 58 23 2 79 26 25 1 2 32 21 27 2 0.02 86 2 11 13 24 2 12 2 8 2 24 12 2 0.2 23 27 0.3 2 0.4 0.1 2 0.3 21 1.8 1 21 5 21 2 19 0.04 22 1 0.1 21 2 0.2 2 0.03

N Medium Large

Small (per cent)

Mean Medium (per cent) Large (per cent) Small (per cent) Large (per cent)

Median Medium (per cent)

Income tax Share-based payments Goodwill Restoration provisions Impairment FX translation Intangibles Superannuation Financial instruments Revenue recognition Other Total

Notes: Means and medians are the means and medians of the percentage changes in 2004-year A-GAAP net income from that particular reconciling item. The base for calculating the percentage is the absolute value of A-GAAP net income for the 2004-year

International nancial reporting 467

Table IV. Percentage change in A-GAAP net income from the most signicant items for small, medium and large rms

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Income tax Goodwill Restoration provisions Impairment Intangibles Financial instruments FX translation Share-based payments Superannuation Revenue recognition Other Total 21 2 12 4.3 21 22 0.2

Notes: Means and medians are the means and medians of the percentage changes in 2004-year A-GAAP equity from that particular reconciling item. The base for calculating the percentage is the absolute value of A-GAAP equity for the 2004-year

Table V. Percentage change in A-GAAP equity from the most signicant items for small, medium and large rms N Medium Large 33 21 18 12 11 13 9 14 15 7 29 182 33 18 27 2 14 2 41 0.1 10 2 24 0 2 0.4 2 16 28 2 19 24 0.29 2 0.04 25 1 2 7.0 24 0 22 29 2 18 2 19 22 24 2 0.4 22 22 2 17.7 36 5 23 2 19 21 0 2 2 24 1 2 2 0.1 2 13 0 0 21 0 2 0.04 0 0 2 1.0 17 18 7 9 5 5 7 2 2 3 13 88 Small (per cent) Mean Medium (per cent) Large (per cent) Small (per cent) Median Medium (per cent) Large (per cent) 21 1 21 24 21 0 0 21 2 0.30 21 0 2 7.6 5 6 5 3 5 2 3 2 0 2 3 32

Small

Share-based payments For share-based payments, there is a monotonic decrease in means and medians with rm size for net income indicating this accounting is more material for small rms. Adjustments to equity also show a percentage decline with rm size. Since, the accounting for the expense is equity neutral there are fewer equity adjustments overall. There are fewer adjustments for small and medium rms, as equity adjustments are mainly for de-recognition of loans to employees for share purchases. Such loans are now debited to equity under AASB 2 and are more prevalent in large rms, as might be expected (AASB, 2004b). Goodwill One rm with an increase in its net income of about 1,250 per cent from reversal of goodwill amortisation, accounts for much of the large mean of 220 per cent for small rms. Without that rm the grand mean is about 12 per cent. As we report impairment separately, it is, therefore, expected that all size categories experience average increases to income and equity for goodwill. Goodwill amortisation and assets are less material with increases in rm size, hence the decline in median percentages for net income and equity. Restoration provisions About 65 per cent of the rms with restoration provision adjustments are from the extractive industries. Despite the frequency of this item, its amount is only above 5 per cent of net income and equity for small rms. Most rms are under-providing for future restoration and rehabilitation according to the standard, evidenced by the negative medians for all three size groups. Impairment Write-downs due to impairment are the largest median percentage change for net income and for equity for large rms and are quite large for small and to a lesser extent medium rms. Most effects are negative as expected. The positive mean for medium rms shown in Table IV, is due to the reversal of a previous write-down which is permitted under AASB 136, except for goodwill (AASB, 2004e). The extractive industries are the most common industry group represented at about 39 per cent of rms and these rms have the largest write downs. FX translation FX translation mainly comprises changes to the functional currency of foreign subsidiaries and recognition of foreign exchange gains/losses directly in reserves for rms that previously used the temporal method under A-GAAP, with the latter reason being the more material of the two. For example, the large mean for medium rms for net income is mainly due to three rms with a net income increase of about 60 per cent and one with a decrease of about 35 per cent. Intangibles other than goodwill The negative adjustments to equity for small rms are mainly due to derecognitions of large R&D assets, giving the large mean decrease of 41 per cent. With respect to large rms, the mean decrease of 18 per cent is mainly caused by derecognition of customer

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acquisition costs and the reversal of previous revaluations. There is a corresponding positive effect on net income for the small rms as the amortisation is also derecognised. Superannuation Adjustments for superannuation are quite a common adjustment for large rms but not medium or small rms. It is noteworthy that while the effects from the standards requirements to recognise the net surplus/decit from dened benets plans are negative, they are about 1 per cent or less of net income and of equity. This indicates that while a number of rms were unfunded at 31 December 2004 according to the standard, most adjustments are immaterial. Financial instruments The large negative means and medians for net income and equity relate to reclassication of equity as debt for three listed trusts, with the result that each of these rms has a 100 per cent fall in net income and equity. Revenue recognition In most cases, A-IFRS has resulted in delayed recognition of revenue and the associated cost of sales, causing net income and equity to fall when a prot on sale is recognised under A-GAAP. Hence, most adjustments across all sizes are negative except for the large mean for medium-sized rms. That mean is due to the transfer of a large loss (revenue and cost of sales) from 2004 to 2005 by one property development rm. Other The other category mainly comprises changes due to investments, lease accounting and adjustments for property plant and equipment. The large percentage increase for net income for small rms is due to one rm recognising a gain on a previously recognised deferred liability that is part of a lease transaction. In sum, it is evident that A-IFRS has had some highly material effects on net income and equity but that these effects are concentrated in a few rms with particular characteristics. Examples include intangible-intensive small rms and small rms with tax-losses, which each have net income and equity increases, and large rms recognising deferred tax liabilities on impairment losses which have equity decreases from A-IFRS. Variability of net income To answer the question of whether net income is more variable under A-IFRS, we examine the standard deviation and interquartile range of earnings scaled by market value at the start of the earnings measurement interval[4]. An F-test for difference in variances between each of the pairs of earnings numbers is conducted and the p-values from those tests are reported. As standard deviations are sensitive to outliers, the interquartile range, which is the range between the 25th and 75th percentiles, is also used. Both full- and half-year earnings levels and half-year earnings changes are examined to increase robustness of the analysis. Since, the 2004 earnings are not fully A-IFRS compliant[5], we also measure the variability of 2005 half-year earnings level and its change, and compare those numbers with the earnings numbers for the same corresponding periods for 2004. We recognise that time-series variation may affect inferences from this latter analysis but this limitation is unavoidable here.

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The results are presented in Table VI. The standard deviations of earnings and p-values shown in Panel A, reveal that for small rms, earnings variability is signicantly higher under A-IFRS for both the 2004 year and 2004 last half-year earnings change ( p-values 0.00 and 0.01, respectively). The standard deviation for the 2004 half-year earnings is also higher under A-IFRS but it is insignicant. Conversely, the 2005 A-IFRS half-year earnings standard deviation is 0.19 and it is signicantly less variable than the corresponding periods A-IFRS earnings the previous year of 0.43, reported in the row above ( p-value 0.00). It is also signicantly less variable than the A-GAAP earnings for this period of 0.39, also reported in the row above ( p-value 0.00). The 2005 half-year earnings change is also less under A-IFRS but is insignicant. The interquartile ranges shown in Panel B, generally do not support the standard deviation results, with the one exception being the 2004 half-year earnings change. Outliers may explain the inconsistencies. Examination of the data reveals one rm accounts for much of the signicant and higher standard deviations under A-IFRS. Removal of this rm does not change inferences from the interquartiles ranges but gives standard deviations of 0.18 and 0.19 for the A-GAAP and A-IFRS 2004 earnings. These differences are insignicant. Removal of that rm also gives standard deviations of 0.40 for A-GAAP and A-IFRS 2004 half-year earnings changes and this difference is insignicant. The 2004 last half-year earnings change remains signicantly higher under A-IFRS after removal. Much of the higher earnings variability in small rms, therefore, is due to one rm. With respect to medium-sized rms, a different picture emerges. The standard deviation of the 2005 half-year earnings of 0.27, is more signicant than both the 2004 half-year standard deviations in the row above ( p-values 0.00 and 0.00, respectively). The 2005 half-year earnings change standard deviation is also larger and more signicant than A-GAAP earnings at the 1 per cent level. Other standard deviations are insignicant. However, the interquartile ranges are inconsistent with these two signicant standard deviations. For instance, the interquartile range for the 2005 half-year is lower under A-IFRS (0.06) than under A-GAAP for the corresponding period (0.07), and lower than under A-IFRS for the corresponding period (0.07). The interquartile range for 2005 half-year earnings change is also less than the 2004 half-year earnings change. These results suggest that earnings volatility is lower under A-IFRS. Again, outliers may be the cause for these inconsistencies. Examining the data set reveals a small number of large values for A-IFRS. Removal of one observation from the 2005 half-year earnings, and the largest from each of the two comparative earnings, gives the same standard deviation under A-IFRS for 2005 of 0.11 compared with a standard deviation for 2004 half-year A-GAAP (A-IFRS) earnings of 0.11 and 0.10. The differences are not signicant. The three interquartile ranges are similar at about 0.6. Removal of two large positive values and one negative value for A-IFRS earnings for the 2005 half-year change, gives a lower but insignicant standard deviation under A-IFRS ( p-value 0.29)[6]. The interquartile range does not change. Excluding a small number of observations, there is evidence of a decrease in earnings variability under A-IFRS as measured by both the standard deviation and range. Overall, we conclude there is weak evidence of a decline in earnings variability. As for small rms, the increases in earnings variability are for a small number of rms.

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Panel A Standard deviation 2004 year earnings p-value 2004 half-year earnings p-value 2005 half-year earnings p-value * 2004 last half-year earnings D p-value 2004 half-year earnings D 2005 half-year earnings D p-value Panel B interquartile range 2004 year earnings 2004 half-year earnings 2005 half-year earnings 2004 last half-year earnings D 2004 half-year earnings D 2005 half-year earnings D 0.18 0.00 0.39 0.28 0.00 0.22 0.01 0.46 0.41 0.22 0.18 0.09 0.07 0.05 0.09 0.04 0.07 0.17 0.07 0.10 0.14 0.04 0.16 0.07 0.15 0.07 0.06 0.05 0.00 0.08 0.05 0.04 0.03 0.52 0.00 0.15 0.11 0.43 0.19 0.00 0.32 0.00 0.27 0.02 0.10 0.49 0.27 0.00 0.26 0.38 0.24 0.43 0.16 0.15 0.28 0.31 0.10 0.26 0.26 0.24 0.50

Notes: Earnings numbers are scaled by the market value of equity at the start of that earnings measurement interval; *p-values in this row are for the

F-tests conducted on a comparison with the 2005 half-year earnings standard deviation and each of the standard deviations in the earnings row above

Table VI. Earnings variability under A-IFRS and A-GAAP for small, medium and large rms Small A-GAAP 0.61 0.31 0.20 0.00 0.10 0.07 0.09 0.03 0.03 0.05 0.03 A-IFRS A-GAAP A-IFRS A-GAAP A-IFRS Medium Large

The results for large rms show mixed evidence. The 2004 year earnings is signicantly more variable under A-IFRS ( p-value 0.10), which is supported by the higher interquartile range of 0.09 versus 0.08 under A-GAAP. However, the 2005 half-year earnings is signicantly less variable than both the 2004 half-year A-GAAP and A-IFRS earnings. The interquartile ranges are not inconsistent with these results. A signicantly lower A-IFRS earnings is also evident for 2005 half-year earnings change and the interquartile range is the same. We interpret these results as mixed evidence that earnings variability has changed for large rms under A-IFRS. In summary, our strongest evidence that earnings variability is higher under A-IFRS is for small rms for fully-compliant (2005) A-IFRS half-year earnings and the 2004 earnings change. We nd some evidence that earnings variability has decreased under A-IFRS, especially for medium-sized rms. The evidence is mixed for large rms. The higher variability under A-IFRS is concentrated in a small number of rms materially affected by A-IFRS regardless of rm size. The large increases in earnings variability predicted by some are not common in this studys data. Conclusion Our analyses suggest that the transition to A-IFRS has not been onerous for small rms. Most small rms are unaffected by A-IFRS and those that are affected have fewer changes to make to net income and to equity than both medium- and large-sized rms. There is an increasing trend in both the percentage of rms affected by A-IFRS and the number of changes to net income and to equity with rm size. We conclude that the transition A-IFRS has not been onerous for small rms. Our results also indicate that the average small rm has a net income and an equity increase from A-IFRS. Subsequent analyses reveal that the primary reason for these increases is tax benets and deferred tax assets from tax losses, recognised under the less stringent recognition rules and reversal of goodwill amortisation. A-IFRS has not had a material affect on total assets for the average rm, but has increased liabilities for all rm sizes. Large rms have the biggest percentage increase in liabilities and consequently the biggest percentage decrease in equity. Impairments is the main material adjustment for large rms. Finally, we nd modest support for the contention that earnings variability for small rms has increased from A-IFRS, consistent with some commentators. This increase is in 2005 when the accounts are fully A-IFRS compliant and for half-year earnings change for the last half of 2004. The results for medium-sized and large rms are mixed with some indicating a variability decrease, especially for medium-sized rms. Since, most small rms are unaffected by A-IFRS the changes in earnings variability are due to a few rms that have large changes in (scaled) net income. We conclude that A-IFRS has not had as detrimental affect on small rms as on medium and large rms. A possible limitation of this study is the generalisability of the results in certain circumstances since we use the reconciliations required in AASB 1 and only 31 December balance date rms. A select number of A-IFRS such as AASB 139 (AASB, 2004f), do not have to be applied retrospectively. Hence, our analyses of the impact of A-IFRS on the accounts exclude those standards not applied retrospectively. Additionally, banks are not included in our sample and some contend banks will have higher earnings variability under A-IFRS (Moullakis, 2005). If banks have higher variability, our results on variability may not be generalisable for large rms in particular.

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Notes 1. Two advantages claimed at that time were that high-quality and internationally-accepted accounting standards will improve the comparability of accounts and Australian rms will be able to access international capital markets at a lower cost. 2. The AASB is a public sector body which issues accounting standards applicable for Australian rms. 3. There is no percentage of comparable magnitude for assets or for equity because for that rm, total assets and equity began from large A-GAAP bases of about $114m and $113m, respectively, meaning that the percentage change from A-IFRS is a lot less for those two elements. 4. For brevity, earnings and net income are used interchangeably in this paper. 5. One can argue that the 2005 earnings are not fully A-IFRS compliant because of transition rules for accounting for dened benets superannuation, for example. Nevertheless, the standard arguably most likely to increase variability is AASB 139 Financial Instruments, and that standard must be applied from 1 January 2005. 6. We also removed the three largest by absolute value, A-GAAP numbers. References AICD (2004), Transitional arrangements for smaller companies in relation to international nancial reporting standards, discussion paper, Australian Institute of Company Directors, available at: www.aph.gov.au/Senate/committee/corporations_ctte/aas/ submissions/sublist.htm (accessed 8 September 2004). Alfredson, K. (2005) Submission to the Parliamentary Joint Committee on Corporations and Financial Services, available at: www.aph.gov.au/Senate/committee/corporations_ctte/ aas/submissions/sublist.htm Andrews, B. (2005), Standards deviation, Business Review Weekly, 17 February, p. 86. Australian Accounting Standards Board (1989), Accounting for Income Tax (Tax-effect Accounting), Australian Accounting Standard AASB 1020, Australian Accounting Standards Board, Melbourne. Australian Accounting Standards Board (2004a), First-time Adoption of Australian Equivalents to International Financial Reporting Standards, Australian Accounting Standard AASB 1, Australian Accounting Standards Board, Melbourne. Australian Accounting Standards Board (2004b), Share-based Payment, Australian Accounting Standard AASB 2, Australian Accounting Standards Board, Melbourne. Australian Accounting Standards Board (2004c), Income Taxes, Australian Accounting Standard AASB 112, Australian Accounting Standards Board, Melbourne. Australian Accounting Standards Board (2004d), Accounting for Government Grants and Disclosure of Government Assistance, Australian Accounting Standard AASB 120, Australian Accounting Standards Board, Melbourne. Australian Accounting Standards Board (2004e), Impairment of Assets, Australian Accounting Standard AASB 136, Australian Accounting Standards Board, Melbourne. Australian Accounting Standards Board (2004f), Financial Instruments: Recognition and Measurement, Australian Accounting Standard AASB 139, Australian Accounting Standards Board, Melbourne. Bufni, F. (2005), Companies explain accounting changes, Financial Review, 19 May, p. 6. Electrometal Technologies (2004) Annual Report, Electrometal Technologies Ltd.

ICAA (2005) Submission to the Parliamentary Joint Committee on Corporations and Financial Services, The Institute of Chartered Accountants in Australia, available at: www.aph.gov. au/Senate/committee/corporations_ctte/aas/submissions/sublist.htm Moullakis, J. (2005), Research points to limited IFRS impact on banks, Financial Review, 17 January, p. 41. NIA (2005) Submission to the Parliamentary Joint Committee on Corporations and Financial Services, National Institute of Accountants, available at: www.aph.gov.au/Senate/ committee/corporations_ctte/aas/submissions/sublist.htm Oriental Technologies (2004) Annual Report, Oriental Technologies. Pitcher Partners (2005) Submission to the Parliamentary Joint Committee on Corporations and Financial Services, available at: www.aph.gov.au/Senate/committee/corporations_ctte/ aas/submissions/sublist.htm PKF (2005) Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Pannel Kerr Forster, available at: www.aph.gov.au/Senate/committee/ corporations_ctte/aas/submissions/sublist.htm Tasmania Mines (2004) Annual Report, Tasmania Mines. Wong, P. (2005) Speech on the Corporations and Financial Services Committee, Senate Hansard, available at: www.parlininfoweb.aph.gov.au/piweb//view_document.aspx? Further reading Andrews, B. and Heathcote, A. (2005), Snapshots: green light for IFRS, Business Review Weekly, February, pp. 89-90. Corresponding author John Goodwin can be contacted at: john.goodwin@rmit.edu.au

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