Have IFRS Made A Difference To Intra Country Financial Reporting Diversity - 2011 - The British Accounting Review PDF

The British Accounting Review 43 (2011) 2238
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Have IFRS made a difference to intra-country nancial reporting

diversity?
Stewart Jones a, *, Aimee Finley b
a
University of Sydney, Sydney NSW 2006, Australia
b
KPMG, Sydney, Australia
a r t i c l e i n f o a b s t r a c t
Article history: According to the International Accounting Standards Board (IASB), International Financial
Received 9 December 2008 Reporting Standards (IFRS) are intended to provide a common set of globally applicable
Accepted 21 October 2010 accounting standards, having the ultimate aim of reducing international nancial report-
ing diversity. Much previous research on standards harmonisation has been conducted on
JEL classication: relatively small samples and in periods which pre-date the introduction of mandatory IFRS
M41
in the EU and Australia. Most of these studies have also relied on some form of indexing
G18
technique to measure harmonisation (such as the modied C-index) which have since
F23
been challenged in the literature. Based on a sample of 81,560 rm years, this study
Keywords: examines whether the mandatory IFRS regime has led to any signicant reductions in
Coefcient of variation
overall nancial reporting diversity by companies within the EU and Australia. Financial
Financial reporting diversity
reporting diversity is proxied by the variability of several balance sheet, income statement
IFRS
and cash ow statement ratios measured over the pre-IFRS and post-IFRS periods. Vari-
ability is measured by the coefcient of variation (CV), a scale neutral measure of
dispersion of a probability distribution. This measure avoids many of the methodological
problems associated with index techniques. Notwithstanding some mixed ndings, the
group mean comparisons and multiple regression results indicate some statistically
signicant reductions in the variability of ratio measures in the post-IFRS period, even after
controlling for factors such as rm size, industry and adoption status (whether a country is
an IFRS adopter or not). While the results should be viewed as preliminary, they provide
some tentative support for IASBs current policy direction towards global accounting
standards convergence (for instance, the IASBFASB convergence project). The results also
have implications for other countries contemplating a shift to IFRS, such as the United
States and several Asian nations, including Japan and India. A useful direction for future
research is to determine whether the same results hold using a more extensive post-IFRS
sample.
2010 Elsevier Ltd. All rights reserved.
1. Introduction and background
According to the International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) are
intended to provide a common set of globally applicable accounting standards, having the ultimate aim of reducing inter-
national nancial reporting diversity (Ali, 2005; Whittington, 2005). As stated by Sir David Tweedie, the current Chairman of
the IASB, before the US Senate Subcommittee on Securities, Insurance, and Investment (October, 2007), in relation to adoption
of IFRS by US listed companies:
* Corresponding author.
E-mail address: stewart.jones@sydney.edu.au (S. Jones).
0890-8389/$ see front matter 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.bar.2010.10.004
S. Jones, A. Finley / The British Accounting Review 43 (2011) 2238 23
A common nancial language, applied consistently, will enable investors to compare more easily the nancial results of
companies operating in different jurisdictions and provide more opportunity for investment and diversication. The
removal of a major investment riskdthe concern that the nuances of different national accounting regimes have not
been fully understooddshould open new opportunities for diversication and improved investment returns.1
The EUs commitment to IFRS initially came from the conclusions of the European Commissions report Accounting
Harmonisation: A New Strategy vis--vis International Harmonisation. The main motivation is that while the Fourth and
Seventh Company Law Directives2 provide a basis for harmonised accounts for both individual and groups of companies
within the Economic Union (EU), they did not meet more rigorous disclosure requirements elsewhere in the world, partic-
ularly accounting standards issued by the US Financial Accounting Standards Board (FASB).
Consistent with the IASBs harmonisation program, in March 2000 the European Commission introduced a new regulation
that required listed enterprises on a regulated market in the EU (including the 30 EU and European Economic Area (EEA)
member states) to prepare their consolidated accounts in accordance with IFRS, effective as of 1st January 2005 (Pacter, 2005;
Whittington, 2005). Following these developments, in the EU alone more than 7,000 listed companies subsequently became
obliged to prepare their consolidated accounts on an IFRS basis (Delvaille & Ebbers, 2005).
Australia also adopted IFRS from 1 January 2005. The assumption made by Australian regulators is that adoption of IFRS
will facilitate cross-border comparability in nancial reporting, thereby raising the visibility of Australian businesses inter-
nationally and potentially reducing the cost of capital. Reducing international reporting diversity was a key driver in the
Australian Governments decision to mandate the adoption of IFRS by Australian public companies under the Corporate Law
Economic Program Act (1999). As stated by the Treasury Department of the Federal Government:
The Government has long recognised the benet to Australia of a common global accounting language. In a globalised
economy with large and growing cross-border capital movements, high quality internationally accepted accounting
standards will facilitate cross-border comparisons by investors and enable Australian companies to access international
capital markets at lower cost.3
Reducing international nancial reporting diversity has been widely touted as a major goal of the Treasury Department,
and the Financial Reporting Council (FRC) which oversees accounting standard setting in Australia. The Treasury Department
of the Australian Government explained what the harmonisation of accounting standards would actually entail:
Any departures by Australia from IASB standards could rapidly erode the advantages of a common language and in
particular the acceptance overseas of Australian companies nancial statements as IASB compliant.4
With the mandatory introduction of IFRS in the EU and Australia, a reduction in nancial reporting diversity might be
expected.5 As stated by Whittington (2005, p.129)
The adoption of international standards by the EU is a good example of the nature of the demand. There was no existing
single set of accounting standards within the EU: rather there was a variety of national standards of varying degrees of
completeness, sophistication and authority, reecting different national traditions and institutional arrangements.
There are currently 15 countries in the EU, 3 in the Economic Area, and 10 more countries scheduled to join in 2004
[sic], a total of 28 countries, so that, without common accounting standards, there could be 28 different national
methods of accounting, in addition to the use of IFRS and of US GAAP which is permitted by some EU countries.
A large number of public companies, exhibiting signicant heterogeneity in size, capital structure, ownership structure
and accounting sophistication, have adopted IFRS for the rst time (Schipper, 2005). Even in Australia, where standard setters
have committed to an established accounting standards harmonisation program since the mid-1990s, IFRS have nevertheless
introduced a raft of new practices and standards, particularly in controversial areas such as recognition and measurement of
nancial instruments, intangibles and investment properties (Reilly & Teoh, 2006). However, while we might expect the
introduction of IFRS to have some impact on nancial reporting diversity, this is not necessarily a foregone conclusion if prior
literature is a guide. For instance, the literature distinguishes between accounting practice harmonisation and accounting
regulation harmonisation (Rahman & Perera, 2002). Harmonizing nancial practices cannot necessarily be achieved solely by
aligning regulatory frameworks (such as introducing a new accounting standards regime). For instance, Henry et al. (2009)
observe that among EU companies, net income and shareholders equity reconciliation amounts differ signicantly by
industry and by legal origin of the rms home. The authors raise questions about the homogeneity of IFRS as implemented by
companies in the EU (see also Clatworthy and Jones, 2008; Gray et al., 2009; Kvaal and Nobes, 2010). Jones and Higgins (2006)
1
Statement by Sir David Tweedie available at: http://www.iasb.org/News/PressReleases/SirDavidTweedieaddressesUSSenate.htm, 25th
October, 2007.
2
Company law harmonisation is based on Article 54(3)(g) of the EC Treaty. The Fourth Council Directive (78/660/EEC) of 25 July 1978 requires all limited
liability companies to prepare annual accounts. The Fourth Directive seeks comparability and equivalence of nancial information rather than complete
standardisation of accounting rules. The Seventh Council Directive (83/349/EEC) of 13 June 1983 relates to consolidated accounts. It requires a parent
company to prepare, in addition to its individual accounts, consolidated accounts and a consolidated annual report.
3
See the Corporate Law and Economic Reform Program (CLERP) Discussion Paper No.9 p.102.
4
See CLERP No.9 p.104.
5
For the purposes of this study, nancial reporting variability simply means the difference in reporting practices under each countries local GAAP and
those practices reported under IFRS.
24 S. Jones, A. Finley / The British Accounting Review 43 (2011) 2238
predicted that smaller companies may be less compliant with IFRS in the early years of implementation given the high cost of
the regulation and the lower perceived benets of IFRS to smaller companies. Schipper (2005) and Brown and Tarca (2005)
emphasised the importance of appropriate enforcement mechanisms to ensure domestic compliance with IFRS. As observed
by Schipper (2005, p.106): The quality of nancial reporting is crucially dependent on vigorous enforcement that is separate
from the nancial reporting standard setting function. In the absence of effective enforcement, the ultimate impact of IFRS on
reducing international reporting diversity could be much diminished.
Nor would we necessarily expect the pattern in reduction in nancial reporting diversity across all IFRS adopting nations
to be uniform or consistent (see Kvaal and Nobes, 2010). For example, in a study of Finnish accounting standards, Pirinen
(2005) found that while the effects of IFRS have been notable, the standards have not caused any drastic changes in
accounting practice as their requirements have been written as alternatives in legislation (EU Directives were written into
Finnish accounting legislation in the 1990s). Similar to developments in the UK, Australia had committed to an accounting
standards harmonisation program at least a decade prior to the introduction of IFRS.6 Hence, we might expect less overall
nancial reporting diversity in Australia and the UK relative to some other EU countries which have tended to exhibit a high
degree of reporting heterogeneity across local GAAPs (Whittington, 2005). Given the importance of IFRS to the IASBs mission
of reducing intra-country nancial reporting diversity, the current research study is both timely and relevant. The intro-
duction of IFRS into the EU and Australia from 1st January 2005 provides a unique research opportunity to study the effects of
IFRS on nancial reporting diversity in a mandatory environment. The shift to a mandatory environment provides a more
controlled experimental setting to examine the before and after effects of the regulatory change. Furthermore, there is an
opportunity to extend on previous research by examining a very large sample of IFRS adopting entities in a diverse multi-
country setting. Using a comprehensive sample allows a more systematic and rigorous investigation of IFRS at the intra-
country and intra-industry level, as well as exploring whether rm specic factors, such as rm size, are associated with
nancial reporting variability following the introduction of IFRS. The remainder of this paper is organised as follows. Section 2
discusses prior literature and hypothesis development. Section 3 introduces the studys methodology, including sample
selection procedures data collection and variable denitions. Section 4 presents the empirical results. Finally, concluding
comments are provided.
2. Prior Literature and Hypothesis Development
Much recent research has investigated capital market impacts of IFRS adoption. For instance, Daske et al. (2008) nd that on
average, market liquidity increases around the time of IFRS adoption. The study also documents a decrease in rms cost of
capital and an increase in equity valuations under certain conditions (see also Li, 2010). Further, Schleicher et al. (2010) suggest
that IFRS adoption might have improved the functioning of capital markets in relation to small rms in "insider" economies.
There are comparatively few recent empirical studies which have investigated whether IFRS adoption has resulted in
a reduction in nancial reporting diversity. Early research efforts formally to measure harmonisation improvements
concluded that adoption of international accounting standards (IAS) does not signicantly reduce international reporting
diversity, at least not among European nations. For example, Emenyonu and Gray (1992) studied certain prot measurement
and asset valuation practices of a small sample of companies from France, Germany and the UK in 1989. They concluded that
measurement treatments were quite diverse, mainly due to the exibility of measurement provisions provided by the EU
Fourth Directive (similar results were reported by Van der Tas, 1988 & Archer et al., 1995). A more extensive study was carried
out by Hermann and Thomas (1995) across eight EC countries and 217 large companies for the year 1991/1992. While there
were some mixed ndings, they found harmonisation was generally low across the sampled companies. Emenyonu and Gray
(1996) undertook an empirical study of the accounting measurement methods used by a sample of large listed companies in
ve major countries (i.e., France, Germany, Japan, the U.K. and the U.S) over a 20-year period from 1971/72 to 1991/92. They
reported that the effectiveness of harmonisation efforts were quite modest and concluded that: international accounting
harmonization remains a desirable but often elusive goal. (p.278).
Street and Gray, (1999a, 1999b) examined a sample of companies ostensibly claiming to be IFRS compliant, but discovered
that there was a high degree of non-compliance with these standards. Murphy (2000) examined the impact of IAS on the
comparability of four specic accounting practices. Overall, she found little evidence that the adoption of IAS was the primary
factor contributing to an level of harmonisation. While a majority of the tests indicate that harmonisation has occurred, it
could not be determined that these changes were the result of using IAS. Canibano and Mora (2000) reported that since the
1980s global players seemed to be involved in a process of spontaneous de facto measurement harmonisation, which was
occurring independently from the formal harmonisation of accounting standards (p.366). The authors argue that this process
creates pressure to achieve formal harmony (p.367).
The mere adoption of international accounting standards and quantication of the extent of compliance with a specic
standard does not necessarily ensure convergence and is not the same as measuring the extent of harmonisation. As noted by
Ali (2005, p.2) international accounting standards allow different methods, so compliance may be high but degree of
6
In 1996, the AASB issued Policy Statement 6 International Harmonisation Policy, which stated that the AASBs international harmonisation objective was
to pursue the development of an internationally accepted set of accounting standards which can be adopted in Australia. The AASB has long since
embarked on its harmonisation project designed to bring many of Australias existing standards into line with the IASs.
harmony may be low. This emphasises the need to examine empirically whether or not convergence of nancial reporting
practices has actually occurred in the post-IFRS adoption period.
Prior literature highlights the relevance of this study. While many prior studies have attempted to measure international
accounting standards harmonisation, most empirical studies have used relatively small company samples drawn from a
limited number of European countries. Several studies are conducted across quite limited time frames. Furthermore, nearly all
studies to date are based on voluntary disclosure practices which pre-date the decision of the EU and Australia to move to
a mandatory IFRS regime. The typical methodology used in these studies involves some form of indexing technique or
comparison of actual compliance with certain selected accounting standards. Much of this research has developed from the
work of Van der Tas (1988) and Archer et al. (1995, 1996). These indices (see Tarca, 1998 for a review) include: (a) H-index to
measure harmonisation within countries; (b) C-index to measure harmonisation within countries where there is multiple
reporting; (c) I-index to measure harmonisation between countries.
Archer et al. (1995) further decomposed the C-index into within country and between-country effects. Later Archer et al.
(1996) developed a more complex version of the C-index based on a nested hierarchy of loglinear models.7 However, such
indexing techniques have been challenged in the literature. For example, Krisement (1997) critiqued the C-index concluding
that the C-index may not directly be used as a measure of comparability (p.475) and is not additively decomposable
according to geographical criteria. (p.475). Emenyonu and Gray (1996) also noted a number of computation and interpretative
issues with the I-index employed in their study.8 Aisbitt (2001) critiqued Archers (1995) decomposed C-index, identifying at
least two major difculties with the C-index: (1) problems relating to causal inference; and (2) problems relating to properties
of the indices. Aisbitt (2001) argued that the inter-play between these issues suggests that interpretation of the C-index is
complex and problematic. She concluded that overcoming these obstacles would require a more intricate model, which might
prove less satisfactory than a qualitative analysis based on closer examination of the base data. (p.51).
This study extends existing literature in several ways. First, it investigates whether IFRS have had any impact on nancial
reporting diversity in a mandatory reporting environment, as opposed to a voluntary reporting environment. For instance,
Soderstrom and Sun (2007) state while the extant literature has found a generally positive impact of IFRS adoption on
accounting quality, it is not possible to generalise results based on studies exploring voluntary IFRS adoption to the current EU
setting, where IFRS adoption is mandatory from 1st January 2005. Would a mandatory IFRS environment have a greater
impact on reducing nancial reporting diversity than has been previously documented by studies based on voluntary
adoption practices? Second, using a very large sample of IFRS adopting companies (around 80% of the population in the pre-
IFRS and post-IFRS periods), this study can provide a more rigorous basis for various statistical comparisons and general-
isations. Hence, a greater degree of reliance can be placed on the studys empirical results and ndings. Finally, the study uses
a measure of variability, the coefcient of variation, which avoids certain methodological and interpretative problems
associated with various indexing techniques used in the literature. Indexing techniques, and their variants, are not all directly
comparable which tends to limit the external validity of empirical results reported across different studies. Unlike an indexing
technique, the coefcient of variability is a simple scale neutral measure of variation that requires no subjective input or
judgement from the researcher in its construction and interpretation.
Using a wide cross section of nancial ratios derived from the nancial statements of EU and Australian companies, this study
examines nancial reporting diversity (as proxied by the variation in 21 nancial ratios measured in the pre-IFRS and post-IFRS
periods) at the intra-country level, the intra-industry level and across different size groups of IFRS adopting companies.
2.1. Hypothesis of the Study
This study examines three specic hypotheses which are tested using EU and Australian nancial statement data prepared
on (i) an IFRS reporting basis and (ii) on the basis of each countrys local or domestic accounting standards prior to the formal
introduction of IFRS. Financial statement data comprised key nancial ratios extracted from reporting periods both before and
after the adoption of IFRS.
The null hypotheses of the study are formally set out as follows:
Hypothesis 1: There are no signicant reductions in nancial reporting diversity among IFRS adopting countries post the
introduction of IFRS, ceteris paribus.
Hypothesis 2: There are no signicant reductions in nancial reporting diversity among IFRS adopting countries at the
industry level post the introduction of IFRS, ceteris paribus.
Hypothesis 3: There are no signicant reductions in nancial reporting diversity among larger versus smaller companies post
the introduction of IFRS, ceteris paribus.
Hypothesis 1 (H1) tests the effect that country of origin has on the variability of nancial reporting practices.
Jaafar and McLeay (2007) observe that country of domicile is a signicant determinant in accounting policy choice
7
See also Morris and Parker (1998), and Parker and Morris (2001) for some further discussion of indexing techniques.
8
Morris and Parker (1998) discuss the statistical properties of Van der Tas (1988) I-index and Archer et al. (1995) between country C-index. The latter
index was found to be more stable when the number of countries represented in the index is increased.
(Ali, 2005; Frank, 1979).The introduction of IFRS for member countries within the EU and Australia required rms to use IFRS9
and hence there is an expectation that the variability of nancial reporting practices (as proxied by the nancial ratios used in
this study) will be signicantly reduced if IFRS are achieving their objectives of enhancing intra-country reporting comparability.
In order to test H1, the sample data was partitioned at the country level (EU and Australia), and nancial reporting variability
(as captured by the coefcient of variation of nancial ratios) examined before and after the introduction of IFRS.
Hypothesis 2 (H2) posits that if the IASBs harmonisation goals are effective, rms operating within the same industry
group or sector should also experience a signicant reduction in nancial reporting diversity post the introduction of IFRS,
although not necessarily to the same extent as the country-level reductions in reporting diversity. For instance, Peill (2000)
study of twelve EU countries between 19871997 found substantially higher harmonisation among international industries,
than at the country level. In this scenario, the sample data was partitioned at the industry level (EU and Australia), and
nancial reporting diversity compared before and after the introduction of IFRS.We might expect more heterogeneity in
accounting practices at the rm specic level, rather than the industry level. Firms from the same industry group tend to use
similar accounting treatments for the same or similar accounting transactions, as opposed to rms from different industries.
Jaafar and McLeay (2007) support this hypothesis, demonstrating that characteristics such as industry background can be
a signicant determinant in explaining accounting policy choice. McLeay and Fieldsend (1987) and Jones and Hensher (2004)
also provide evidence that sector specic effects can have a signicant inuence on the behaviour of nancial ratios. This is
mainly due to differences in operating, nancing and investing characteristics across different industry groups (Foster, 1986).
Hypothesis 3 (H3) posits that rm size (measured by market capitalisation) can also impact on the variability of nancial
reporting practices. The political costs literature suggests that larger rms tend to be more compliant with accounting
regulation, partly because they are under constant scrutiny by analysts, investors and regulators (Watts, 1996). Jones and
Ratnatunga (1997, p.70) stated given that nancial statements have greater economic consequences for larger rms, larger
rms are more likely to be susceptible to various assessments and evaluations of rm performance by external users. If there
is more compliance, we would expect a greater reduction in the variation of nancial reporting practices (as proxied by the
nancial ratios) of larger sized rms relative to smaller rms, post the introduction of IFRS. Previous research on the
implementation of IFRS suggests that larger rms tended to have greater knowledge of IFRS including their expected
nancial reporting impacts, and were generally more advanced in the implementation process than smaller rms (Jones &
Higgins 2006). With regard to smaller rms, the FRC in Australia has expressed concerns over the preparedness of small
companies to fully adopt IFRS (one reason being the cost of the reforms). For the most part smaller rms have fewer resources
to train and educate staff on the technical application of IFRS. Hence, there is an expectation that smaller rms may not fully
comply with IFRS, at least in the initial stages of adoption, to the same extent as larger rms.
3. Methodology
This section discusses the sampling characteristics and methodology of the study.
3.1. Sample selection and data collection
The data used for this study was extracted from Thomson Reuters One Banker and Worldscope databases. A number of
nancial variables and ratios were sourced from EU and Australian companies over the period 19942004 and 2006. This
resulted in a total sample of 81,560 rm years making up the EU and Australian samples. The sample included public companies
only. The sample incorporated Australia and the great majority of EU member nations where nancial data was available on
Worldscope. Countries in the analysis included: Australia, United Kingdom, Germany, Austria, France, Spain, Ireland, Hungary,
Greece, Sweden, Portugal, Belgium, the Czech Republic, Italy, Denmark, Norway, Poland, Finland and Luxemburg. The total rm
years sampled for each country is set out in Appendix 1. The following non-IFRS adopting countries were used as control
variables in the regression analysis: Russia, Albania, Armenia and Canada.10
9
In the case of Australia, the focus of this study is on Australian equivalents of IFRS (A-IFRS) not IFRS per se. While there are some differences between A-
IFRS and IFRS, such as the removal of the proportionate consolidation method from IAS 28, the IFRS and AASB standards are virtually identical (in fact, they
are required to be under Australias CLERP legislation). By identical we mean that that the IFRS standard issued by the IASB was the same standard that was
adopted and re-issued by the Australian Accounting Standards Board with mandatory application to all publicly listed companies in Australia. Recently,
even relatively minor differences to A-IFRS and IFRS have been removed (for example, until recently AASB 107 Cash Flow Statements continued to
mandate the direct method for reporting cash ows, as originally required in the pre-IFRS version of the Standard. AASB 107 has now been revised to
permit the direct and indirect method of reporting, rendering the Standard consistent with IFRS). Member nations of the EU also adopt in most respects an
identical version of IFRS with only slight modications to the original IFRS standards. However, this is notwithstanding intensive lobbying from the banking
industry in Europe to create a carve out of international accounting standards that would effectively allow signicant changes to the classication of
nancial assets. This would allow nancial institutions to potentially avoid a fair value calculation for all nancial instruments including derivatives.Some
commentators believe this could have signicant ramications for intra-company comparability, at least as they relate to nancial instruments. Amend-
ments to IFRS to make them sector neutral standards are beyond the scope of this study.
10
The Russian Duma had given preliminary approval to a legislative bill which would require companies (having more than one subsidiary) to prepare
nancial statements on an IFRS basis starting either in 2004/2005. It now appears that the legislation was stalled in the Duma. For instance, a news report in
Vedomosti (a leading Russian business newspaper) indicated that plans to implement IFRS had come to a standstill (2nd February 2005). Canada is included
in the control group on the basis that the regulatory institutions and nancial reporting environment have some close similarities with Australia.
Financial data for the 2005 reporting period was removed from the sample and excluded from the subsequent analysis to
eliminate any potential noise in the analysis.11 The 2006 reporting period is the rst period in which sampled companies in
Australia and the EU with non-December nancial year end dates were required to prepare their full year nancial statements
in accordance with IFRS. We point out that dropping the 2005 year did cause a signicant (but unavoidable) loss of data
in respect of companies which had a December nancial year end date in that year. In 2005, approximately 26% of European
companies in the sample appeared to have December nancial year end dates,12 but a much smaller number of Australian
companies had a December nancial year end date (around 9%).13 Furthermore, the UK had a slightly smaller percentage
of companies with a December nancial year end date in 2005 relative to the EU sample overall (around 23%). As Australia and
the UK make up more than 45% of the sample, and the total sample of the study uses around 80% of the population of all listed
rms in the EU and Australia, the removal of 2005 is not expected to have a signicant impact on the results.14
The sample period is made up of eleven reporting periods of nancial information prepared according to each countrys
own local or domestic accounting standards (19942004) and one year of IFRS data which includes all rst time adopters, and
some second year adopters in the case of companies with December nancial year end dates.15 Hence forward we refer to the
post-IFRS period of this study as FYE2006.
3.2. Measurement method
For the purposes of this study, nancial reporting diversity simply means the differences in corporate reporting practices
which can arise between a countrys own local GAAP and those reporting practices and requirements based on IFRS. An
important methodological question is how to measure this diversity or variability. A useful and widely used measure to
capture the variability in a sample population is the coefcient of variance (CV), which is a normalised measure of dispersion
of a probability distribution. The measure is discussed in numerous econometric and statistical texts (e.g., Gujarati, 2002) and
is a standard output in most statistical software packages (such as SPSS). There are numerous applications of the measure in
the social sciences literature (Breunig, 2001; Grifths, 1996; Sorensen, 2002).
The coefcient of variation has an extensive literature and is widely used in applied probability elds such as reliability
theory. Conceptually, the CV measure is related to the Sharpe ratio in nance, which is the mean or expected value of the risk
adjusted return divided by the standard deviation (Sharpe, 1994). The CV is dened as the standard deviation s of a variable
divided by its mean m. The main strength of this measure is that it is scale neutral, which is appropriate for heterogeneous
populations. The formula for the coefcient of variance (CV) is based on the familiar standard deviation measure, which is
arguably the most fundamental and widely used measure of variability utilised in the nancial literature:
The CV measure is widely used when units of analysis need to be standardised given heterogeneity across the sample. As our sample
exhibits a high degree heterogeneity in reporting practices across different jurisdictions (particularly between IFRS and the local GAAPs
of various countries), the CV measure is appropriate to this study. The CV measure is not sensitive to differences in scale between units of
measurements, and hence is a particularly useful measure for capturing reporting variability as proxied by the nancial ratios used in
this study. Unlike an indexing technique used in much previous research, the coefcient of variability is a simple scale neutral measure
of variance that requires no particular subjective judgement or interpretative input from the researcher in its construction and
interpretation. However, a potential limitation of the CV measure is when the mean value is near zero, the coefcient of variation is
sensitive to small changes in the mean, limiting its usefulness. Hence, it is important to examine the magnitude and behaviour of the
denominator of the CV (the means) in any analysis based on the coefcient of variation (discussed further in the results section).
3.3. Testing the hypotheses
The hypotheses were tested using independent sample t-tests of the group means of each variables CV measure both in the
pre-IFRS and post-IFRS periods. Additional analysis based on regression analysis is provided in Section 4.4. The particular tests
11
There are at least two reasons why we excluded the 2005 year from the analysis. First, we found examples of companies in the EU sample which
voluntarily shifted to a full IFRS reporting basis in 2005, but we could not determine the exact number (in Australia early adoption of IFRS was not
permitted by the AASB). Voluntary adopters can potentially confound our results, although we have no evidence to believe that the number of early
adopters is signicant. While 2005 data has been removed, it is possible that there were early adopters in the 2004 reporting period, however the studys
ndings do not control for early adopters prior to 2005. Second, we did not include companies with December 2005 nancial year end dates formally in the
analysis as Thomson-Reuters data does not provide complete information on this data eld. When we downloaded the scal year end date data eld from
Worldscope, it produced numerous missing cells, hence it was not possible to make an accurate determination of how many companies actually had
December nancial year end dates in 2005.
12
Financial year end dates for other months of 2005 are as follows: November (approx 1%); October (approx 2%); September (approx 8%); August (approx
2%); June (approx 10%); May (approx 2%); April (approx 3%); March (approx 18%); February (approx 3%); and January (approx 3%).
13
Around 64% of Australian companies had June nancial year end dates, with remainder scattered fairly evenly over other months of the year.
14
Notwithstanding the limitations in identifying rms with December 2005 nancial year end dates (see note 10 above), sensitivity analysis was con-
ducted on the results when 2005 data (i.e., rms with December 2005 nancial year end dates) was both included and excluded from the sample.
Interestingly, including the 2005 data in the analysis actually strengthened the empirical results of the study, hence we do not expect our results are unduly
biased by excluding 2005 from the analysis). However, this result needs to be treated with caution given the difculties experienced in accurately isolating
rms with December 2005 nancial year end dates using Worldscope data.
15
During the writing and revising of this paper, an additional year of nancial statement data was collected for 2007. However, extending the sample to
2007 produced results which were qualitatively similar to the current ndings reported in this study.
performed also take into account Levenes test for equality of variances. Non-parametric equivalent tests (such as the Mann-
Whitney U tests) were used as a robustness check on the parametric measures, but are not tabulated in the results. The data
collected in this study represent a very large sample of IFRS adopting entities, embracing all listed companies available on the
Worldscope database. As there are many smaller entities in the sample, their respective nancial data is likely to be
susceptible to extreme observations or outliers.16
Ratios used in the study

In order to measure variability in nancial reporting practices in the pre- and post-IFRS periods, a total of 21 nancial
ratios were used in the analysis (the ratios are dened in Appendix 2). These ratios were selected because they are considered
broadly representative of most of the commonly used ratios in accounting and nance literature over the past two decades
(Foster, 1986; Palepu et al., 2008). As IFRS were anticipated to have their most signicant impact on the protability, earnings
quality and nancial position of adopting companies (Jones and Higgins, 2006), ratio measures which focused on the income
statement and balance sheet (and to a more limited extent the cash ow statement) were selected. Ratio measures based on
rate of change (or growth) or price (such as price earnings and yield ratios) were not examined as these measures are not
directly impacted by IFRS. The study did not directly measure or evaluate the CV of raw nancial statements variables, such as
sales, net income and total assets. This is because raw measures do not control for size differences across rms and are more
subject to the distorting effects of extreme values. Major nancial ratio categories included: (i) protability and earnings (ii)
liquidity and solvency (iii) cash ow and (iv) capital structure.
The analysis was also based on four test variables, each representing a different time frame for comparing nancial
reporting variability pre-IFRS and in FYE2006. The test variables ranged from one year prior to IFRS adoption, three years prior
to IFRS adoption, ve years prior to IFRS adoption and ten years prior. The test variables were coded DEPEND1, DEPEND3,
DEPEND5 and DEPEND10 respectively. For example, DEPEND1 is a comparison of the mean CV of each CV variable in FYE2006
with one year of pre-IFRS data (excluding 2005). Likewise, DEPEND3 is a comparison of the studys CV variables in FYE2006
with three years of pre-IFRS data (excluding 2005); whereas DEPEND5 is a comparison of the mean CV of the studys CV
variables in FYE2006 with ve years of pre-IFRS data (excluding 2005) and so on. The use of four test variables is to control for
potential extraneous variables and omitted factors that could inuence the variability in reporting practices over the different
time periods in the study. If statistically signicant reductions in variability can be observed across a broad cross section of
nancial variables, and across all time frames in the study (ie., across all four test variables) this will instil greater condence
that the driver for this change is the introduction of IFRS. A multiple regression analysis using the CV measures as the
dependent variable is provided Section 4.4.
4. Results
From a preliminary review of the results, the CV measure for several of the nancial variables analysed indicate
a signicant narrowing in FYE2006. While there are clearly some mixed results, overall it would appear that all three null
hypotheses can be rejected with generally strong statistical evidence indicating reduced nancial reporting diversity,
as proxied by the ratio measures, across all sampled countries and industries and over most if not all time frames examined.
4.1. Intra-country results
To test the intra-country reporting diversity hypothesis, the CV measure was calculated for each variable across each
country in the study. These results were then pooled and the mean values of the pre-IFRS and FYE2006 CV measures
compared statistically over each of the four test variables, each of which represented a different time frame in the analysis. It
is noted that it was not possible to generate a meaningful statistical test of reporting variability between pre-IFRS and
FYE2006 for each individual country in the sample. The coefcient of variability requires the calculation of each variables
standard deviation (i.e., at the country level, the standard deviation measure varies across individual countries but not within
countries). Hence, pooling the mean CV values for each country is necessary to construct a valid statistical test of the mean
differences in CV between the pre-IFRS and FYE2006 periods.
The examination of earnings and protability ratios reveal a trend of consistent decreases in the mean value of the CV
measure across all test variable comparisons. We conclude there is enough evidence to reject null Hypothesis 1 for this
particular category of ratios. Panel A of Table 1 below displays the mean results for each test variable i.e., DEPEND1, DEPEND3,
DEPEND5 and DEPEND10. Panel B of Table 1 reports the changes in the mean value of the CV measure on the liquidity and
solvency ratios, whereas Panel C displays the changes in the mean value of the CV measure on each of the cash ow ratios.
Finally, Panel D documents results on the capital structure ratios. While we test a relatively limited set of nancial ratios in
this study, we believe they are representative of the most important ratio groups commonly used in academic research. We
16
Following accepted conventions in the literature, the top and bottom 2% of observations were removed from the nancial ratio measures examined in
the analysis. The data were coded according classication schemes used by the Worldscope database (particularly with respect to country and industry
codes).
Table 1
Intra-country ratio variability Pre-IFRS and Post-IFRS
Key Financial Ratios DEPEND1 % change DEPEND3 % change DEPEND5 % change DEPEND10 % change
CV CV CV CV
Mean CV Mean CV Mean CV Mean CV
Panel A - Earnings Return on assets Post IFRS 549.22 549.22 549.22 549.22
and Protability Pre IFRS 1539.24 64.32** 8721.60 93.70** 5778.95 90.50** 4141.13 86.74**
ratios: Return on equity Post IFRS 1405.47 1405.47 1405.47 1405.47
Pre IFRS 2407.03 41.61** 2728.43 48.49** 6002.95 76.59** 4145.37 66.10**
Return on Post IFRS 796.83 796.83 796.83 796.83
Investment equity Pre IFRS 2034.89 60.84** 1428.90 44.23** 2173.54 63.34** 2789.60 71.44**
Retained earnings Post IFRS 3524.12 3524.12 3524.12 3524.12
to assets Pre IFRS 507.67 594.16 ** 476.33 639.85 ** 963.18 265.88 ** 2124.87 65.85 **
As reported EPS Post IFRS 447.49 447.49 447.49 447.49
Pre IFRS 2057.67 78.25** 6874.75 93.49** 4923.13 90.91** 3567.24 87.46**
EPS Last 12 Post IFRS 403.21 403.21 403.21 403.21
Months Pre IFRS 2614.14 84.58** 3776.83 89.32** 3840.85 89.50** 3528.04 88.57**
EBITTA PostIFRS 623.79 623.79 623.79 623.79
Pre IFRS 1555.52 59.90** 1959.13 68.16** 1574.53 60.38** 6735.20 90.74**
EBITDATA Post IFRS 508.20 508.20 508.20 508.20
Pre IFRS 500.98 1.44 ** 511.21 0.59** 488.42 4.05 ** 432.85 17.41 **
Panel B - Liquidity Current ratio Post IFRS 231.10 231.10 231.10 231.10
and Solvency Pre IFRS 256.00 9.73** 259.69 11.01** 245.06 5.70** 212.39 8.81 **
ratios: Quick ratio Post IFRS 259.34 259.34 259.34 259.34
Pre IFRS 291.30 10.97** 290.88 10.84** 266.95 2.85** 240.49 7.84 **
Cover ratio Post IFRS 894.78 894.78 894.78 894.78
Pre IFRS 1834.54 51.23** 1694.46 47.19** 1640.35 45.45** 1361.95 34.30**
Tangible book Post IFRS 397.00 397.00 397.00 397.00
value per share Pre IFRS 2210.60 82.04** 3885.29 89.78** 3702.94 89.28** 2499.63 84.12**
Working capital Post IFRS 459.38 459.38 459.38 459.38
pre share Pre IFRS 1368.91 66.44** 1165.38 60.58** 1807.44 74.58** 2670.52 82.80**
Cash ow cover Post IFRS 700.02 700.02 700.02 700.02
Pre IFRS 669.98 4.48 ** 5396.80 87.03** 6790.08 89.69** 4492.37 84.42**
Cash resources to Post IFRS 112.54 112.54 112.54 112.54
total assets Pre IFRS 115.19 2.31** 119.40 5.75** 121.21 7.16** 123.27 8.70**
Total debt to Post IFRS 366.65 366.65 366.65 366.65
cash ow Pre IFRS 363.79 0.78 ** 323.38 13.38 ** 311.49 17.71 ** 25.03 25.03 **
Panel C Cash Cash ow per Post IFRS 339.71 339.71 339.71 339.71
ow ratios: share Pre IFRS 1254.26 72.92** 1575.75 78.44** 2077.04 83.64** 2670.61 87.28**
Free cash ow Post IFRS 4036.07 4036.07 4036.07 4036.07
per share Pre IFRS 5935.02 32.00** 4475.83 9.83** 3898.57 3.53 ** 3344.34 20.68 **
Net operating Post IFRS 529.24 529.24 529.24 529.24
cash ow to Pre IFRS 804.42 34.21** 765.28 30.84** 7681.15 93.11** 5386.65 90.18**
total assets
Panel D Capital Total debt to Post IFRS 140.87 140.87 140.87 140.87
structure total assets Pre IFRS 177.94 20.84** 165.70 14.99** 151.24 6.86** 136.11 3.50 **
ratios: Gearing Post IFRS 187.44 187.44 187.44 187.44
Pre IFRS 187.36 0.04 ** 177.59 5.55 ** 175.40 6.86 ** 169.26 10.74 **
Note: *Signicance level <.1 **Signicance <.05. This table displays intra-country changes in the coefcient of variability over the pre- and post-IFRS
reporting periods for (i) earnings and protability ratios; (ii) liquidity and solvency ratios; (iii) cash ow ratios and (iv) capital structure ratios. The treatment
group represents all EU and Australian rms available in the Worldscope database. In the context of this study, the coefcient of variation measures the
change in nancial reporting variability pre- and post the introduction of IFRS. A negative CV indicates a reduction in reporting diversity post the intro-
duction of IFRS. A positive number indicates an increase in reporting diversity post the introduction of IFRS. Signicance tests are based on independent
t-tests of the mean CV value of each variable pre- and post-IFRS adoption. The table also displays the pre- and post-IFRS coefcient of variation for each
variable in the study.
note that the inclusion of other ratio measures, including raw nancial statement items (such as sales revenue, total debt, total
assets and so on) did not materially affect the results of this study.
The most noteworthy nding for the earnings and protability ratios (Panel A) is that the majority of percentage
changes to the mean CV value are greater than 50% (note that a negative value indicate a reduction in nancial reporting
diversity). For example, Panel A of Table 1 shows that the coefcient of variability for the return on assets measure was
1539.24% one year prior to IFRS (as indicated by DEPEND1) and 549.22% post IFRS. This is a reduction in the coefcient of
variability of 64.32%. For the DEPEND3 period (i.e., where the coefcient of variability is calculated three years prior to
IFRS adoption), the coefcient of variability is reduced by 93.70%. For the DEPEND10 period (where the coefcient of
variability is calculated 10 years prior to IFRS adoption) the reduction in the coefcient of variability is 86.74%. Note that
these are country level results i.e., the coefcient of variability for the return on assets measure is aggregated for all rms
across all countries.
It can be seen from Panel A that this result is consistent across all test variables (DEPEND1, DEPEND3, DEPEND5,
DEPEND10). Hence, the mean value of the CV measure for most variables in Panel A has been signicantly reduced no matter
what time frame is applied to calculate the CV measure on the pre-IFRS nancial data. For instance, even if CV is calculated on
up to 10 years of pre-IFRS data, the FYE2006 reduction in CV for most variables is still signicantly greater. This nding tends
to mitigate, in a limited way, the possibility that extraneous factors or omitted variables in a particular year or period might be
driving the observed reduction in ratio variability following the introduction of IFRS. A more formal approach to controlling
for extraneous factors, involving regression analysis is provided in Section 4.4.
Rate of return on assets, rate of return on equity, rate of return on investment, reported EPS, EPS last 12 months, and EBIT
to total assets all show substantial reductions in variability in FYE2006 and across all time frames applied in the study. The
intra-country variability of the rate of return on equity variable has been reduced by 41.61% in FYE2006, and reduced further
by 48.49%, 76.59% and 66.10% respectively for the DEPEND3, DEPEND5 and DEPEND10 variables. Return on investment, as
reported EPS, EPS last 12 months and EBIT to total assets all show the same pattern of substantial reductions in intra-country
variability in FYE2006 over all time frames applied in the study.
The only two variables that were not consistent with this trend are retained earnings to total assets and EBITDA to total
assets.17 As can be seen from Table 1 (Panel A), the EBITDA to total assets ratio shows a small but signicant increase in the
mean CV on the DEPEND1 and DEPEND5 variables, and an even larger increase (17.41%) on the DEPEND10 variable. It is
interesting to contrast this result with the EBIT to total assets variable (which includes depreciation and amortisation charges
in the numerator of the ratio). For EBIT to total assets (EBITTA) Panel A shows sharp reductions in the mean value of CV across
all test variables in the analysis. This result could indicate that a substantial change brought about by IFRS relate to the
accounting treatment for depreciation and amortisation charges. In the case of Australia, Jones and Higgins (2006) observed
that IFRS requirements relating to identiable intangibles and purchased goodwill were among the standards expected to
have the greatest impact on Australian reporting practices. For instance, prior to the introduction of IFRS, Australia tolerated
a wide diversity of intangible reporting practices, including the recognition of internally generated intangibles (see Jones, in
press). When the more conservative requirements of IAS 38 were introduced in Australia from 1st January 2005, several large
Australian companies were required to de-recognise signicant amounts of intangibles (i.e., assets that failed the recognition
criteria under IAS 38). The de-recognition of intangibles have both balance sheet and income statement effects (through
amortisation). The removal of the amortisation requirements for purchased goodwill under IFRS 3 (previously IAS 22) was
another IFRS standard which was expected to have a substantial impact on the reported earnings numbers of many
companies.
The rather dramatic increase in variability of the retained earnings to total asset gure may potentially be explained by the
accounting effects of rst time IFRS adoption which were transacted through retained earnings for most EU and Australian
companies. As IFRS are likely to impact on many rms and industries in different ways, it is perhaps not surprising that there
is more variability than usual in how the retained earnings number is reported by many companies in FYE2006.18 For
instance, the de-recognition of intangibles by several large Australian companies (relating to rst time adoption of IAS 38) was
transacted through retained earning by most of these entities.
Liquidity and solvency ratios (Panel B of Table 1) also reveal signicant ndings, with some very substantial reductions
in the mean value of the CV measure across a number of variables in FYE2006. The intra-country variability of the current
ratio, quick ratio and cash resources to total assets ratio show statistically signicant reductions in variability in FYE2006
over most of the test variable comparisons. However, the book value per share measure, working capital per share and
interest cover ratios indicates the most dramatic reductions in variability. For example, the reductions in variability for
the book value per share ratio is substantial across all time frames with reductions of 82.04%, 89.78%, 89.28 and 84.12%
respectively for the DEPEND1, DEPEND3, DEPEND5 and DEPEND10 variables. The same observation is true for the working
capital per share ratio, with reductions in the mean value of the CV measure of 66.44%, 60.58%, 74.58 and 82.80%
respectively for the DEPEND1, DEPEND3, DEPEND5 and DEPEND10 variables. The only variable not consistent with this
trend is the debt to cash ow variable which showed a slight increase on the DEPEND1 variable, but more elevated
increases in variability across the DEPEND3, DEPEND5 and DEPEND10 variables. The only explanation for this result is
that IFRS has had more of a direct impact on the calculation of asset values and income numbers of companies relative to
reported debt levels.
This is partly conrmed by analysis of results in Panel C and D of Table 1. As can be seen from Panel C, most of the cash
ow variables appear to show substantial reductions in CV over all time frames. For example, the variability of the cash
ow per share variable has been reduced by 72.92% in FYE2006, and by 78.44%, 83.64% and 87.28% respectively for
DEPEND3, DEPEND5 and DEPEND10 variables. Likewise, the cash ow return variable (operating cash ow to total assets)
has been reduced by 34.21% in FYE2006, and by 30.84%, 93.11% and 90.18% respectively for the DEPEND3, DEPEND5 and
DEPEND10 variables. Only the free cash ow per share variable produced mixed results across the four test variable
17
EBITDA is earnings before interest, taxation, depreciation and amortisation. See Appendix 2 for ratio denitions.
18
For example, paragraph 11 of IFRS 1 First-time Adoption of International Financial Reporting Standards states: The accounting policies that an entity
uses in its opening IFRS statement of nancial position may differ from those that it used for the same date using its previous GAAP. The resulting
adjustments arise from events and transactions before the date of transition to IFRS. Therefore, an entity shall recognise those adjustments directly in
retained earnings (or, if appropriate, another category of equity) at the date of transition to IFRS.
measures, with statistically signicant reductions in reporting variability on the DEPEND1 and DEPEND3 variables, but
statistically signicant increases on the DEPEND5 and DEPEND10 variables. Panel D indicates statistically signicant
reductions in intra-country variability on the total debt to total assets ratio over all time frames except DEPEND10, but the
gearing ratio (total debt to total equity) indicates relatively small but statistically signicant increases in intra-country
variability.
4.2. Intra-industry results
We also examined the behaviour of ratios across industry groups in the pre-IFRS and FYE2006 periods. In this instance, the
coefcient of variability was calculated across industries, not at the country level as was the case in Table 1. Industries were
classied according to the GICS codes available in Worldscope. These results were then pooled and the mean values of the pre-
IFRS and FYE2006 CV measures compared statistically. Once again, we point out that it was not possible to generate a valid
statistical test of reporting variability for the pre-IFRS and FYE2006 periods for individual industry groups in the sample. The
coefcient of variability requires the calculation of each variables standard deviation, and there is only one standard devi-
ation value possible for each industry group (and for each test variable) when the CV measure is calculated at the industry
level. Pooling the mean CV values for each industry group produces sufcient data points to construct a valid statistical test of
mean differences in CV in the pre-IFRS and FYE2006 periods.
The earnings and protability ratios show signicant intra-industry reductions in variability across the majority of the
ratios tested in the analysis. However, the results are generally a little more mixed than those reported in Table 1. Similar
to the results documented in Table 1, the most noteworthy nding for the earnings and protability ratios (Panel A of
Table 2) is that the majority of percentage changes to the mean CV are quite substantial. This result is generally consistent
across all test variables (DEPEND1, DEPEND3, DEPEND5, DEDEND10). Rate of return on equity, as reported EPS, EPS last 12
months, EBIT to total assets, and EBITDA to total assets all show substantial intra-industry reductions in variability when
CV is calculated at the industry level in FYE2006. For example, the intra-industry variability of the rate of return on equity
variable has been reduced by 92.49% in FYE2006 based on nancial data prepared one year prior to IFRS (DEPEND1).
However, the narrowing of intra-industry variability for this ratio is substantial across all other time frames, including
reductions of 83.67%, 76.73,% and 66.10%, respectively, for the DEPEND3, DEPEND5 and DEPEND10 variables. Likewise, the
intra-industry variability of the EBIT to total assets variable has been reduced by 85.15% in FYE2006, and by 84.15%, 75.77%
and 90.74% respectively for DEPEND3, DEPEND5 and DEPEND10 variables. Three variables not consistent with this trend
are rate of return on assets, return on investment and retained earnings to total assets. The increase in variability of the
retained earnings to total asset ratio was not as dramatic as that reported in Table 1, but again this result can potentially
be explained by the fact that accounting changes resulting from rst time IFRS adoption (i.e., rms with non-December
nancial end year dates) is passed through retained earnings for most EU and Australian companies. Hence, we might
expect a higher level of variability of this ratio in FYE2006. While the increasing variability of rate of return on assets and
return on investment are confounding, the overall results are suggestive of signicant intra-industry reductions in CV in
FYE2006.
Liquidity and solvency ratios also reveal some signicant ndings, with some sizeable reductions in the CV measure in
FYE2006 across a number of variables. However, these reductions are generally not as great as those reported Table 1. The
intra-industry variability of the current ratio, quick ratio and cash resources to total assets ratio all show statistically
signicant reductions in variability in FYE2006 across most of the test variables of this study. However, the book value per
share variable, while displaying signicant variability reductions was not as dramatic as the result reported in Panel B of Table
1. For instance, the reductions in intra-industry variability for the book value per share ratio was 25.02%, 37.35%, 41.63 and
84.12% respectively for the DEPEND1, DEPEND3, DEPEND5 and DEPEND10 variables. The only variable not consistent with this
trend is the working capital per share and debt to cash ow ratios. The working capital per share ratio indicate largely mixed
results over all time frames, whereas the total debt to cash ow ratio shows a decrease in variation on the DEPEND1 variable,
but increases across the DEPEND3, DEPEND5 and DEPEND10 variables. This behaviour of this ratio is consistent with what
was reported in Section 4.1 above. As stated previously in Section 4.1, this result could be explainable, in part, by the fact that
the debt side of the balance sheet is not likely to be so affected by the introduction of IFRS as assets values and income. Hence,
we would not expect the variability of this ratio to signicantly decline in FYE2006, at least not to the same extent as other
ratios.
As can be seen from Panel C of Table 2, most of the cash ow measures show a substantial intra-industry reduction in
variability over all time frames. For example, the variability of the cash ow per share variable has been reduced by 50.18% in
FYE2006, and by 95.99%, 93.91% and 87.28% respectively for the DEPEND3, DEPEND5 and DEPEND10 variables. Likewise, the
free cash ow per share variable has been reduced by 35.45% in FYE2006, and by 41.62% and 46.60% for the DEPEND3 and
DEPEND5 variables, but increased by 20.68% for the DEPEND10 variable. The cash ow return variable produced a mixed
result on the DEPEND1 variable, but showed statistically signicant intra-industry reductions in variability on the DEPEND3,
DEPEND5 and DEPEND10 variables.
Panel D of Table 2 indicates statistically signicant reductions in intra-industry variability on the total debt to total assets
ratio over all time frames except DEPEND10, but the gearing ratio (total debt to total equity) indicates a relatively small but
statistically signicant increase in variability in FYE2006.
Table 2
Intra-Industry Ratio Variability Pre-IFRS and Post-IFRS
Key Financial Ratios DEPEND1 % change DEPEND3 % change DEPEND5 % change DEPEND10 % change
CV CV CV CV
Mean CV Mean CV Mean CV Mean CV
Panel A - Earnings Return on assets Post IFRS 2583.30 2583.30 2583.30 2583.30
and Protability Pre IFRS 2388.56 8.15 ** 1680.27 53.74 ** 1603.05 61.15 ** 4141.13 86.74**
Ratios: Return on equity Post IFRS 1163.27 1163.27 1163.27 1163.27
Pre IFRS 15480.88 92.49** 7123.01 83.67** 4999.66 76.73** 4145.37 66.10**
Return on Post IFRS 4748.07 4748.07 4748.07 4748.07
Investment equity Pre IFRS 2094.96 126.64 ** 1904.42 149.32 ** 1584.43 199.67 ** 2789.60 71.44**
Retained earnings Post IFRS 2189.07 2189.07 2189.07 2189.07
to assets Pre IFRS 1564.97 39.88 ** 1023.59 113.86 ** 1547.66 41.44 ** 2124.87 65.85 **
As reported EPS Post IFRS 1066.91 1066.91 1066.91 1066.91
Pre IFRS 1671.08 36.15** 1884.61 43.39** 2724.10 60.83** 3567.24 87.46**
EPS Last 12 Months Post IFRS 1371.16 1371.16 1371.16 1371.16
Pre IFRS 2878.88 52.37** 4101.71 66.57** 6438.36 99.18** 3528.04 88.57**
EBITTA Post IFRS 1255.77 1255.77 1255.77 1255.77
Pre IFRS 8456.80 85.15** 7922.25 84.15** 5183.19 75.77** 6735.20 90.74**
EBITDATA Post IFRS 419.10 419.10 419.10 419.10
Pre IFRS 586.30 28.52** 1237.80 66.14** 1088.88 61.51** 432.85 17.41 **
Panel B - Liquidity Current ratio Post IFRS 174.80 174.80 174.80 174.80
and Solvency Pre IFRS 226.23 22.73** 230.59 24.20** 213.31 18.06** 212.39 8.81 **
Ratios Quick ratio Post IFRS 198.66 198.66 198.66 198.66
Pre IFRS 255.97 22.39** 254.96 22.08** 237.90 16.49** 240.49 7.84 **
Cover ratio Post IFRS 972.55 972.55 972.55 972.55
Pre IFRS 1310.23 25.77** 1633.24 40.45** 1436.76 32.31** 1361.95 34.30**
Tangible book value Post IFRS 548.13 548.13 548.13 548.13
per share Pre IFRS 731.01 25.02** 874.93 37.35** 938.99 41.63** 2499.63 84.12**
Working capital Post IFRS 1745.25 1745.25 1745.25 1745.25
pre share Pre IFRS 1526.14 14.36 ** 1860.64 6.20** 1392.95 25.29 2670.52 82.80**
Cash ow cover Post IFRS 783.34 783.34 783.34 783.34
Pre IFRS 1223.44 35.97** 1938.85 59.60** 1652.77 52.60** 4492.37 84.42**
Cash resources to Post IFRS 110.84 110.84 110.84 110.84
total assets Pre IFRS 109.34 1.37 115.69 4.19** 118.13 6.17** 123.27 8.70
Total debt to Post IFRS 275.82 275.82 275.82 275.82
cash ow Pre IFRS 290.26 4.98** 265.70 3.81 ** 261.25 5.58 ** 293.26 25.03 **
Panel C Cash Cash ow per share Post IFRS 430.83 430.83 430.83 430.83
Flow Ratios: Pre IFRS 864.72 50.18** 10740.66 95.99** 7075.57 93.91** 2670.61 87.28**
Free cash ow Post IFRS 1140.30 1140.30 1140.30 1140.30
per share Pre IFRS 1766.45 35.45** 1953.08 41.62** 2135.57 46.60** 3344.34 20.68 **
Net operating cash Post IFRS 1228.10 1228.10 1228.10 1228.10
ow to total assets Pre IFRS 912.24 34.62 ** 1754.86 30.02** 1567.50 21.65** 5386.65 90.18**
Panel D Capital Total debt to total Post IFRS 144.27 144.27 144.27 144.27
Structure assets Pre IFRS 171.38 15.81** 157.86 8.61** 144.81 0.37** 136.11 3.50 **
Ratios: Gearing Post IFRS 178.69 178.69 178.69 178.69
Pre IFRS 175.74 1.68 ** 169.10 5.67 ** 165.70 7.84 ** 169.26 10.74 **
Note: *Signicance level <.1 **Signicance <.05. This table displays intra-industry changes in the coefcient of variability over the pre- and post-IFRS
reporting periods for (i) earnings and protability ratios; (ii) liquidity and solvency ratios; (iii) cash ow ratios and (iv) capital structure ratios. The treatment
group represents all EU and Australian rms available in the Worldscope database. In the context of this study, the coefcient of variation measures the
change in nancial reporting variability pre- and post the introduction of IFRS. A negative CV indicates a reduction in reporting diversity post the intro-
duction of IFRS. A positive number indicates an increase in reporting diversity post the introduction of IFRS. Signicance tests are based on independent
t-tests of the mean CV value of each variable pre- and post-IFRS adoption. The table also displays the pre- and post-IFRS coefcient of variation for each
variable in the study.
Overall, the intra-group reporting variation reductions are signicant, but generally not as substantial as the results
reported at the intra-country level (Table 1). Furthermore, the Table 2 results are somewhat more mixed. To some extent,
these results might be expected given that there is likely to be more heterogeneity in accounting practices at the rm specic
level, rather than the industry level. Firms operating in the same or similar industry group tend to use similar accounting
treatments for the same or similar accounting transactions, in contrast to entities from different industries. This may lead to
less pronounced reductions in reporting variability overall.
4.3. The impact of rm size
This section considers the impact of rm size on ratio variability over the pre-IFRS and FYE2006 periods. For the purposes
of this study, large rms are dened according to the top quartile of the sample based on market capitalisation, and small
rms according to the bottom quartile of the sample based on market capitalisation. The analysis of earnings and protability
ratios from the large rm sample reveal a trend of decreasing variability in FYE2006 for the majority of ratios. The top quartile
rms based on size show consistent reductions in earnings and protability ratios across nearly all ratios and across all time
frames. For space reasons, we do report the ndings of this aspect of the study in tabular format.19 However, our main nding
is that average variability reduced across all earnings and protability variables for the top quartile rms by 24.21%, 63.45%,
65.45% and 65.31% respectively for the DEPEND1, DEPEND3, DEPEND5 and DEPEND10 variables. This contrasts with signif-
icant but generally more modest decreases in variability for the smallest rms. Reductions for the bottom quartile rms are
respectively 33.81%, 23.93%, 41.39% and 32.48 for the DEPEND1, DEPEND3, DEPEND5 and DEPEND10 variables.
The largest rms also show consistent reductions in ratio variability for most liquidity and solvency ratios. Overall, the
average reductions across all liquidity and solvency variables for the top quartile rms was 19.21%, 19.41%, 31.25% and 23.15
respectively for the DEPEND1, DEPEND3, DEPEND5 and DEPEND10 variables. This contrasts with signicant increases in
variability for the same ratios for smaller rms. While the largest rms showed consistent reductions in variability on the cash
ow per share and cash ow return variables, it is interesting to note that bottom quartile rms showed more consistent
reductions overall than larger rms. Further, while top quartile rms showed increasing variability on the capital structure
ratios, this increasing variability was generally signicantly higher for the bottom quartile. Overall, the results point to
a signicant reduction in variability of larger rms as opposed to smaller rms. There are a few potential explanations for
these results. The rst is raised in Jones and Higgins (2006) who predicted that in the initial stages of IFRS adoption, larger
rms are likely to be more IFRS compliant for a variety of reasons, including a range of political cost arguments. Furthermore,
larger rms have had more resources and incentive to commit to the IFRS implementation process relative to smaller rms. As
noted by Jones and Higgins (2006), at the time of their study, larger rms were considerably more advanced with the IFRS
implementation process and had signicantly greater knowledge and awareness of IFRS reporting issues than smaller entities.
A further issue that might explain some of the results is that there is likely to be signicantly greater heterogeneity in the
nancial data of smaller entities relative to larger entities. This can potentially render some of the FYE2006 impacts difcult to
detect when calculating variability measures such as the coefcient of variation. Analysis of the small rm sample indicates
a much higher level of skewness and kurtosis in the data relative to the large rm sample, which can impact on the calculation
of the CV measure. However, sensitivity analysis on the small rm sample, such as reducing the number of outliers and
trimming the sample, did not signicantly change the results.
4.4. Additional analysis
A closer look at the CV measure

In this section we perform additional analysis including certain robustness tests on the results reported above. One potential
limitation of our results relates to the CV measure itself. The CV can potentially be inuenced by changes in the magnitude of the
denominator of the CV formula (the mean), rather than the standard deviation (numerator) over the test periods. For instance, if
the mean of a ratio such as return on assets (ROA) has increased post-IFRS (perhaps because rms have become relatively more
protable over the period), and assuming no change to the standard deviation, this will clearly reduce the overall CV measure
for ROA, thus giving a misleading impression that overall variability in ROA across the sample has decreased post-IFRS. It is
therefore important to examine changes in mean values of all nancial ratios used in the analysis over the sampling period.
Table 3 reports the mean values of all 21 nancial ratios examined in this study over the pre-IFRS and FYE2006 periods.
As can be seen from Table 3, around half the nancial ratios used in this study show a slight increase in their means, while
around half show a reduction in the mean in FYE2006. However, it is noteworthy that the largest mean changes post-IFRS
(FYE2006) are in the direction of smaller mean values. For example, the ratio of retained earnings to total assets reveals that
the mean value of this ratio has decreased 5.76% in FYE2006, whereas the book value per share has decreased 10.66%. The
mean value of the gearing ratio has decreased 11.73% in FYE2006. Smaller mean values will clearly increase the CV ratio
(assuming no change in the standard deviation). We conclude from the analysis of Table 3, that our results have not been
inuenced by the changes in the denominator of CV measure. The studys results may even be understated because the large
increase in the mean values of certain ratios will inate the magnitude of the CV measure calculated for FYE2006, thus biasing
the results more towards acceptance of the null hypotheses.
More sophisticated statistical techniques

The comparison of group means at different intervals before and after the introduction of IFRS supports the hypothesis
that CV measures across several ratio categories has signicantly declined. While before and after statistical comparisons are
useful, a question arises whether the same or similar results would have resulted if more sophisticated statistical techniques
are applied in the analysis. To examine this conjecture, we develop a more sophisticated statistical procedure based on a time
series forecasting model. Using a time series model, we estimate autoregressive coefcients on the pre-IFRS measures of CV
and then compared the forecast errors of the model on the FYE2006 measures of CV.A time series model will better capture
any time potential time dependencies in the data thus providing a more robust econometric basis for determining the
existence of a trend and changes to a trend post-IFRS. Further, if IFRS have had no impact on ratio variability, we would not
expect any discernible changes in the behaviour of the CV measures in FYE2006. In other words, we would not expect the time
series model error rates (i.e., the differences between the models predicted and actual values) to be signicantly different in
19
The authors will supply the results to interested readers on request.
Table 3
Pre-IFRS and Post-IFRS Change in Means of Key Financial Ratios
N Minimum Maximum Pre-IFRS Mean Post-IFRS Mean Mean Difference Sig.
Level
Return on assets 39966 971.69 957.56 2.15 2.39 0.24 0.478

Return on equity 44302 999.58 1000.00 1.54 1.18 2.72 0.001
Return On invested capital 40099 995.93 979.11 1.01 1.91 0.90 0.083
Retained earnings to total assets 41773 996.06 491.22 22.41 28.17 5.76 0.000
As reported EPS 28564 992.99 985.00 1.74 3.07 1.33 0.000
EPS Last 12 Months 44453 7770.66 8935.80 3.25 6.43 3.17 0.005
EBITTA 42910 99.231 730.00 3.23 2.93 0.31 0.494
EBITDA 41709 996.54 730.00 1.74 0.67 1.06 0.014
Current ratio 35592 0.00 494.44 3.25 4.29 1.04 0.000
Quick ratio 35409 0.81 494.44 2.72 3.82 1.10 0.000
Cover ratio 37728 499.58 499.38 5.46 7.94 2.48 0.002
Tangible book value per share 43351 3613.90 9961.69 35.87 25.22 10.66 0.000
Working capital per share 34661 6022.28 9292.37 12.51 11.84 0.67 0.757
Cash ow cover 37757 500.00 498.36 8.40 9.65 1.25 0.104
Cash resources to total assets 41928 0.00 114.18 16.82 20.20 3.28 0.000
Total debt to cash ow 29642 0.00 471.99 6.50 7.21 0.70 0.013
Cash ow per share 43899 875.63 946.46 5.59 4.47 1.12 0.001
Free cash ow per share 39917 8968.05 3288.32 0.54 1.49 2.03 0.006
Net operating cash ow to total assets 37090 950.00 918.41 0.68 1.59 0.92 0.008
Total debt to total assets 44799 0.00 987.32 21.93 19.90 2.03 0.000
Gearing 42300 0.00 999.45 84.41 72.67 11.73 0.000
Note: This tables displays the mean values of all 21 nancial ratios examined in this study over the pre-IFRS and post-IFRS (FYE2006) periods. Table 3 shows
that around half the nancial ratios displays a slight increase in their means, while around half show a reduction in the mean in FYE2006. The largest mean
changes are in the direction of smaller mean values. For example, retained earnings to total assets reveal that the mean value of this ratio has decreased
5.76% in FYE2006, whereas the book value per share has decreased 10.66%. Smaller mean values will increase the CV ratio (assuming no change in the
standard deviation). Hence, Table 3 indicates that the results of the study have not been biased or inuenced by the changes in the denominator of CV
measure.
the pre-IFRS and FYE2006 periods. A marked change in the error rates of the model post-IFRS provides further evidence of
a behavioural shift in the CV measures between the pre-IFRS and FYE2006 periods.
In developing a simple forecasting model, we use a rst order autoregressive time series model (see Greene, 2008). The
autoregressive model is one of a group of linear prediction formulas that attempt to predict an output y[n] of a system based
on the previous outputs ( y[n-1],y[n-2].) and inputs ( x[n], x[n-1], x[n-2].). A rst order autoregressive model is obtained
from a given time series:
Xt 1 F0 F1 Xt et ;
where et is a white-noise series. Note that, the Stationary Condition: | F1| < 1
is expressed as a null hypothesis H0 and being tested. An autoregressive model was tted for each of the CV measures for
the period 1994-2004 and the prediction errors of the model compared on the on pre-IFRS and FYE2006 measures of CV. In
most cases, it was found that the mean error rate was signicantly higher on FYE2006 measures of CV, relative to the pre-IFRS
periods (i.e., the model predicts well in the pre-IFRS period, but not in the post-IFRS period). This suggests that an autore-
gressive model tted on pre-IFRS CV measures is more effective in predicting the pattern of CVs pre-IFRS rather than post
IFRS. There is an unexplained variation in the CV measures in FYE2006 not accounted for by the model. It is hypothesised that
this unexplained variation is the introduction of IFRS. Table 4 displays the differences in mean error rates over the pre-IFRS
and FYE2006 periods.
Because the post-IFRS period (FYE2006) is coded 1, positive mean differences (i.e., differences in the error rates before
and after the introduction of IFRS) indicate that error rates are higher across most CV measures in FYE2006. That is, on average
the model forecasts relatively more poorly in the post-IFRS period, and we expect this result has occurred because of
a fundamental behavioural change or shift in the time series that the model cannot account for (i.e., the introduction of IFRS).
It is noteworthy that the mean difference in error rates pre- and post-IFRS was positive across all CV measures, and a test for
equality of means in prediction in error rates was signicant across all measures. This indicates that the model in Table 4 is
predicting poorly in the post-IFRS period (relative to the pre-IFRS period) across a range of measures and given the signi-
cance levels, these results are unlikely to have occurred by chance variations alone. Overall, these ndings tend to corroborate
the earlier results that there is has been a signicant reduction in CV measures in FYE2006.
A multiple regression framework

Finally, a limitation of the results reported in Sections 4.14.3 is that they do not formally control for potentially
extraneous factors, such as size of the entity, industry background, and for any potentially confounding effects associated
Table 4
Differences in Mean Forecast Error Rates from an First Order Autoregressive Model Pre-IFRS and Post-IFRS
Model Dependent Variables F-value Sig t-value Df Sig Mean n Std. Error Diff. Diff.
Level (2-tailed) Diff. Diff. Upper Lower
Model 1 CV of return on assets 9873.94 0.00 69.84 59545.00 0.00 1.38 0.02 1.34 1.42
Model 2 CV of return on equity 10390.35 0.00 71.72 58888.00 0.00 1.38 0.02 1.34 1.41
Model 3 CV of return on invested 9757.11 0.00 70.24 53635.00 0.00 1.39 0.02 1.35 1.43
capital
Model 4 CV of retained earnings to 10125.84 0.00 69.24 56410.00 0.00 1.33 0.02 1.29 1.37
total assets
Model 5 CV of as reported EPS 7179.23 0.00 65.58 39619.00 0.00 1.47 0.02 1.43 1.51
Model 6 CV of EPS Last 12 Months 10381.68 0.00 71.37 58670.00 0.00 1.36 0.02 1.33 1.40
Model 7 CV of EBITTA 10315.55 0.00 71.74 56853.00 0.00 1.40 0.02 1.37 1.44
Model 8 CV of EBITDA 10239.93 0.00 71.90 55389.00 0.00 1.43 0.02 1.39 1.47
Model 9 CV of current ratio 8138.09 0.00 71.52 47041.00 0.00 1.57 0.02 1.53 1.62
Model 10 CV of quick ratio 8132.66 0.00 71.54 46816.00 0.00 1.58 0.02 1.53 1.62
Model 11 CV of cover ratio 9072.19 0.00 75.57 51547.00 0.00 1.64 0.02 1.60 1.68
Model 12 CV of tangible book value 10156.00 0.00 70.38 57427.00 0.00 1.35 0.02 1.31 1.39
per share
Model 13 CV of working capital 7978.05 0.00 70.27 46018.00 0.00 1.54 0.02 1.50 1.59
per share
Model 14 CV of cash ow cover 9145.87 0.00 75.82 51258.00 0.00 1.65 0.02 1.61 1.69
Model 15 CV of cash resources to 10027.94 0.00 71.34 55483.00 0.00 1.41 0.02 1.37 1.45
total assets
Model 16 CV of total debt to 11148.72 0.00 79.22 52126.00 0.00 1.53 0.02 1.49 1.57
cash ow
Model 17 CV of cash ow per share 10493.18 0.00 71.73 58126.00 0.00 1.38 0.02 1.34 1.42
Model 18 CV of free cash ow 10829.07 0.00 73.93 53640.00 0.00 1.48 0.02 1.44 1.52
per share
Model 19 CV of net operating cash 11614.40 0.00 80.81 51003.00 0.00 1.59 0.02 1.55 1.63
ow to total assets
Model 20 CV of total debt to 10502.96 0.00 71.55 59118.00 0.00 1.37 0.02 1.33 1.40
total assets
Model 21 CV of gearing 10502.68 0.00 71.54 59116.00 0.00 1.37 0.02 1.33 1.40
Note: This table displays the differences in mean error rates over the pre-IFRS and post-IFRS periods. Because the post-IFRS period (FYE2006) is coded 1,
positive mean differences indicate that error rates are higher across most CV measures in the post-IFRS period. Table 4 shows that the mean difference in
error rates was positive across all CV measures, and a test for equality of means in prediction in error rates was signicant across all measures. Overall, these
ndings tend to corroborate other ndings of the study pointing to a signicant reduction in CV measures in FYE2006.
with non-IFRS adopting countries. To analyse the impact of control variables, we introduce a multiple regression framework
where the CV measures are treated as the dependent variables of the model. For the purposes of this analysis, the inde-
pendent variables of the model include: (1) the IFRS period dummy variable, coded 1 for the post-IFRS period (FYE2006)
and 0 otherwise; (2) a dummy variable coded 1 if the rm belonged to an IFRS adopting country and 0 otherwise. We
included four countries that did not report on an IFRS basis (i.e., countries that are not members of the EU). These countries
were Russia, Albania, Armenia and Canada. (3) A size variable dummy was code 1 if a rm was in the top 25% market
capitalisation and 0 if the rm was in the bottom 25% based on market capitalisation; and (4) an industry dummy variable.
We created four industry dummies based on whether a rm belonged to; (i) the old economy sector, (ii) the new economy
sector, (iii) the mining sector and (iv) the nancial services sector (Jones and Hensher, 2004). Preliminary analysis appeared
to indicate that the old economy dummy had the strongest overall impact on results, hence this was the industry dummy
used as a control in the regression results. Multiple regression models were run on each CV measure and some of the most
signicant results are reported in Table 5.20
The regression results indicate that the IFRS period dummy variable is signicant across each of the CV variables. The
parameter estimates are negative, indicating that the CV measures reduced in FYE2006, which is consistent with the notion
that the introduction of IFRS had reduced ratio variability. As can be seen in Table 5, the dummy variable NonAdopters is
consistently negative and signicant, indicating that non adopting IFRS countries tended to have higher CV magnitudes
across key ratios. If the introduction of IFRS had no impact on ratio variability, the parameter estimates for the "Non-
Adopters" dummy should have the same sign as the IFRS period dummy variable, or at least be non signicant. Finally, the
size variable parameter is negative and signicant across nearly all CV measures, indicating a reduction in ratio variability.
This result tends to conrm the results of Sections 4.1-4.3 above, that larger rms showed a more consistent pattern of
decreases in CV measures in FYE2006 relative to other rms. As discussed in Section 4.3, this result can potentially be
20
Not all the CV measures produced consistent results. For some CV measures the parameter estimates were signicant and positive. Hence, the results
need to be interpreted in the context of several mixed results reported in this study.
Table 5
Parameter estimates and t-values (in parenthesis) for each multiple regression model run on CV dependent variables
Model Dependent Variables IFRS Size NonAdopters Industry
Model 1 CV of Rate of Return on Assets 0.049***(7.67) 0.032***(-4.56) 0.031**(-1.89) 0.061**(-2.08)

Model 2 CV of EBIT To Total Assets 0.051***(-7.51) 0.017**(-2.13) 0.012(-1.81) 0.032*(-1.98)
Model 3 CV of As Reported EPS 0.023**(-3.47) 0.001 (0.160) 0.001(0.151) 0.002 (0.173)
Model 4 CV of Retained Earnings to Total Assets 0.028***(-4.86) 0.021**(-2.99) 0.017**(-2.22) 0.023**(-3.17)
Model 5 CV of Current Ratio 0.024***(-3.67) 0.041***(-6.51) 0.021***(-5.19) 0.032***(-4.11)
Model 6 CV of Quick Ratio 0.027***(11.49) 0.091***(-8.32) 0.312***(-8.41) 0.032***(-6.26)
Model 7 CV of Free Cash Flow Per Share .032***(-7.43) .012***(-5.23) .012**(-3.21) .031***(-7.4`)
Model 8 CV of Total Debt To Equity 0.027**(-4.77) 0.003(-0.97) 0.001(-1.17) 0.009(-0.56)
Model 9 CV of Total Debt To Total Assets 0.082***(-10.56) 0.062***(-4.35) 0.052***(-8.69) 0.045***(-6.55)
Note: ***Signicance level <.001, **Signicance level <.01, *Signicance level <.05. Table 5 shows the parameter estimates, t-values (in parenthesis)
and signicance levels for each multiple regression model run on each CV dependent variable. For example, for Model 1 "CV of Rate of Return on Assets",
a multiple regression model is run with this variable as the dependent variable, with the independent variables being "IFRS", "Size", "NonAdopters" and
"Industry". A multiple regression model was run for each CV dependent variable. In all cases displayed in Table 5, the IFRS dummy variable is negative,
suggesting that the coefcient of variation was reduced in FYE2006.
explained by the possibility that smaller rms were less IFRS compliant than larger companies, for a variety of reasons
(Jones and Higgins, 2006).
5. Conclusions
While prior research has attempted to measure the harmonisation effects of international accounting standards, many of
these studies have tended to use small company samples drawn over limited time frames and from a limited number of
European countries. The methodology to measure harmonisation typically involves some form of indexing technique (such as
the modied C-index) which basically entails a comparison of policy choice under certain accounting standards. These
techniques have been critiqued in several studies for a range of methodological and interpretative reasons (Aisbitt, 2001).
Furthermore, much previous literature has examined voluntary adoption practices which pre-date the decision of the EC and
Australia to move to a mandatory IFRS regime. The purpose of the current study is to examine whether nancial reporting
diversity has been reduced as a result of the mandatory introduction of IFRS. The study avoids many of the problems asso-
ciated with indexing methods by using the coefcient of variation to capture nancial reporting variation, as proxied by the
variability of 21 balance sheet, income statement and cash ow ratios measured in the pre-IFRS and FYE2006 periods.
Furthermore, the study is based on a very large sample of listed EU and Australian companies, which has facilitated a more
systematic and rigorous investigation of IFRS at the intra-country and intra-industry level.
The multivariate results appear to demonstrate a consistent pattern of reductions in intra-country and intra-industry ratio
variability as reected by the coefcient of variation, following the introduction of IFRS. However, a limitation of this study is
that there are no controls for EU companies adopting IFRS prior to 2005. For instance, many German companies had
voluntarily adopted IFRS prior to 2005.
Notwithstanding some mixed results and confounding observations, we conclude there is sufcient evidence overall to
reject the null hypotheses established in this study that the introduction of IFRS has had no impact on nancial reporting
diversity at the intra-country or intra-industry level, nor across rms of different size. However, these results at the date of
this study should only be viewed as preliminary. As IFRS had only recently been introduced to member nations of the EU and
Australia at the date of this study (with 2006 as the rst year of reporting for companies with non-December nancial end
year dates), we only have a limited set of post-IFRS observations to base our analysis on. An updated longitudinal study
incorporating a greater number of post-IFRS reporting observations (perhaps 5 years or more) will provide an interesting
point of contrast with the current results. Furthermore, different methodologies could be used to examine the extent of global
accounting convergence. Notwithstanding certain limitations associated with indexing techniques identied in the literature,
it would be interesting to see whether previous studies which have used such techniques would yield different results when
replicated on post-IFRS data. Now that the adoption of IFRS is mandatory, would the results of these studies be any different?
Finally, the results tend to provide some tentative support for IASBs current policy direction towards global accounting
standards convergence (for instance, the IASBFASB convergence project, also known as the Norfolk agreement). The results
may also have some positive implications for other countries contemplating a shift to IFRS, such as the United States and
several Asian nations, including Japan and India, if the motivation for adopting IFRS is an expectation that intra-country
nancial reporting diversity will be reduced.
Acknowledgement
We thank two reviewers and participants at the American Accounting Association conference, New York, 2009 for helpful
suggestions on this paper.
Appendix 1
Country Total rm years sampled
Australia 17040
Austria 1030
Belgium 1440
Czech Republic 170
Germany 9320
Denmark 1640
Spain 1510
Finland 1350
France 8690
Great Britain 23610
Greece 2740
Hungary 240
Ireland 820
Italy 2740
Luxembourg 420
Netherlands 1940
Norway 1690
Poland 1470
Portugal 580
Slovakia 70
Slovenia 110
Sweden 2940
Appendix 2. Denition of nancial ratios used in the study
Ratio Denition
Return on assets Net Income After Tax/Total assets

Return on equity Net Income After Tax Preference Dividends/Total Equity
Return on invested capital Net Income before Preferred Dividends Interest Expense on Debt Interest Capitalized)/
((Last Years Total Capital Last Years Short Term Debt & Current Portion of Long Term Debt)
(Current Years Total Capital Current Years Short Term Debt & Current Portion of Long Term Debt)/2)
[Note: Denition from Thomson-Reuters Worldscope].
Retained earnings to total assets Retained Earnings/Total assets
As reported EPS Per Share Earnings amount reported by the company prior to any adjustments or recalculations.
EPS Last 12 Months Sum of the interim earnings reported in the latest twelve months by the company.
If interim data in not available it is the most recent earnings per share reported
by the company in the last two years [Note: Denition from Thomson-Reuters Worldscope].
EBITTA Earnings Before Interest and Taxation/Total Assets
EBITDA Earnings Before Interest, Taxation, Depreciation and Amortization/Total Assets
Current ratio Current Assets/Current Liabilities
Quick ratio Cash Short Term Investments Receivables/Current Liabilities
Cover ratio Net Income After Tax/Annual Interest Payments
Tangible book value per share Total Assets - Intangibles/Total Shares Outstanding
Working capital per share Current Assets Current Liabilities/Total Shares Outstanding
Cash ow cover Net Operating Cash Flow/Annual Interest Payments
Cash resources to total assets Cash Short Term Investments/Total Assets
Total debt to cash ow Total Interest Bearing Debt/Gross Operating Cash Flow
Cash ow per share Net Operating Cash Flow/Total Shares Outstanding
Free cash ow per share Gross Operating Cash Flow Investment/Total Shares Outstanding
Net operating cash ow to total assets Net Operating Cash Flow/Total Assets
Total debt to total assets Total Interest Bearing Debt/Total Assets
Gearing ratio Total Interest Bearing Debt/Total Equity
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Have IFRS Made A Difference To Intra Country Financial Reporting Diversity - 2011 - The British Accounting Review PDF

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The British Accounting Review 43 (2011) 2238

Contents lists available at ScienceDirect

The British Accounting Review

Have IFRS made a difference to intra-country nancial reporting

1. Introduction and background

2. Prior Literature and Hypothesis Development

2.1. Hypothesis of the Study

3.1. Sample selection and data collection

3.2. Measurement method

3.3. Testing the hypotheses

Ratios used in the study

4.1. Intra-country results

Mean CV Mean CV Mean CV Mean CV

4.2. Intra-industry results

Mean CV Mean CV Mean CV Mean CV

4.3. The impact of rm size

4.4. Additional analysis

A closer look at the CV measure

More sophisticated statistical techniques

N Minimum Maximum Pre-IFRS Mean Post-IFRS Mean Mean Difference Sig.

Return on assets 39966 971.69 957.56 2.15 2.39 0.24 0.478

A multiple regression framework

Model Dependent Variables IFRS Size NonAdopters Industry

Model 1 CV of Rate of Return on Assets 0.049***(7.67) 0.032***(-4.56) 0.031**(-1.89) 0.061**(-2.08)

Country Total rm years sampled

Appendix 2. Denition of nancial ratios used in the study

Return on assets Net Income After Tax/Total assets

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Model 1 CV of Rate of Return on Assets 0.049(7.67) 0.032(-4.56) 0.031(-1.89) 0.061(-2.08)